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STRATEGIES FOR A COMPETITIVE RHODE ISLAND: ASSESSING INNOVATION
POTENTIAL WITH EMPHASIS ON ENERGY AND EASE OF DOING BUSINESS
Joseph W. Roberts, Roger Williams University
Suchandra Basu, Rhode Island College
Ramesh Mohan, Bryant University
Table of Contents
Table of Contents ............................................................................................................................ ii Acknowledgements ........................................................................................................................ iv
Executive Summary ........................................................................................................................ v
Recommendations ..................................................................................................................... vii General .................................................................................................................................. vii Energy .................................................................................................................................. viii Ease of Doing Business ......................................................................................................... ix
Strategies for a Competitive Rhode Island ..................................................................................... 1
Research Question .......................................................................................................................... 1
1. Assessing Innovation Potential (Joseph W. Roberts, Principal Investigator) ............................. 2
Methodology ............................................................................................................................... 4
Rhode Island and Comparative Regional Results ....................................................................... 5
Component Index Results for the Regional Innovation Index .................................................... 8
Human Capital Index .............................................................................................................. 8
Economic Capital Index ........................................................................................................ 11
Business Environment Index ................................................................................................ 13
Energy Index ......................................................................................................................... 14
Quality of Life Index ............................................................................................................ 16
Healthcare Index ................................................................................................................... 18
Ideas Index ............................................................................................................................ 20
Prosperity Index .................................................................................................................... 22
Conclusions and Recommendations ......................................................................................... 25
Recommendations ................................................................................................................. 26
2: Energy (Suchandra Basu, Principal Investigator) ..................................................................... 28
What is a market based cap-and-trade program? ...................................................................... 29
Historical Background, Program Examples and Outcomes ...................................................... 30
The US Acid Rain Program .................................................................................................. 30
European Union Emission Trading System (EU ETS) ......................................................... 31
California’s Global Warming Solutions Act (AB32) ........................................................... 32
The Regional Green House Gas Initiative (RGGI) ............................................................... 34
CO2 Allowance Value and Revenue under RGGI .................................................................... 35
Pathways for Recycling Auction Revenue ............................................................................... 37
Benefits of Participating in the Regional Green House Gas Initiative ..................................... 41
CO2 Emissions: Regional and Rhode Island Trends............................................................. 41
Economic Growth: Regional and Rhode Island Trends ....................................................... 46
iii
CO2 Allowance Value Investment Choices and Returns: Regional and Rhode Island Summary............................................................................................................................................... 49
Further Discussion on Power Sector Impacts in Rhode Island ................................................. 55
Conclusions and Recommendations: Looking Ahead for Rhode Island .................................. 58
3. Ease of Doing Business (Ramesh Mohan, Principal Investigator) ........................................... 62
CNBC 2014 Ease of Doing Business Report ............................................................................ 64
Forbes Report: The Best States for Business and Careers ........................................................ 66
How does this apply to Rhode Island? ...................................................................................... 68
Entrepreneurial resources...................................................................................................... 74
Conclusion and Recommendations ........................................................................................... 78
Recommendations ..................................................................................................................... 79
Appendix A: Regional Innovation Index and Metrics .................................................................. 81
Appendix B ................................................................................................................................... 84
Acknowledgements
This research report was produced through a grant from The College and University
Research Collaborative of Rhode Island, an innovative project to bring academic research and
expertise to state policymakers.
The authors of the report want to acknowledge the special contributions of the following
students who helped in the research and preparation of this report.
Andres Pernia Bryant University
Julia Raso Roger Williams University
Dennis Slavin Rhode Island College
Executive Summary
The media portrait of Rhode Island has often been one of a stagnant economy with minimal
opportunities for development. The perception is that Rhode Island lacks any of the basic tools for
economic development. In the 2014 race for Governor, the candidates all sought to change the
status quo perception of Rhode Island. Governor Gina Raimondo’s budget proposal, introduced
March 12, 2015, seeks to promote economic development by targeting specific industries,
promoting innovation, creating jobs, promoting energy efficiency, and responsibly redeveloping
the Route 195 land. This report helps make the case that these goals are not only possible, but
essential to the future of Rhode Island.
In Part 1, “Assessing Innovation Potential,” a comprehensive Regional Innovation Index is
created based on eight dimensions or Component Indices: Human Capital, Economic Capital,
Business Environment, Energy, Quality of Life,
Healthcare, Ideas, and Prosperity. Rhode Island fares
dismally on two Indices, Economic Capital and
Business Environment, and average on the
Prosperity Index. These three metrics shape the
negative perception of the Rhode Island economy.
The narrative that the business climate is unfriendly
and lacks resources creates an economic environment that is not as prosperous as her neighbors.
The Quality of Life Index is merely average and seems to be a reflection of the media portrayal of
the state. However, the picture is entirely bleak. Rhode Island does well on the Human Capital and
Ideas Indices, which measure the quality of the workforce in terms of education and their ability
to generate ideas, respectively. Both of these measures are critical to innovation and will need to
Rhode Island Rank and Grade on Regional Innovation Index and Sub-Indices
Innovation Index Rank Grade Human Capital 14 B- Economic Capital 45 D- Business Environment 49 F Energy 1 A Quality of Life 28.5 C Healthcare 9 B+ Ideas 6.5 B+ Prosperity 26 C Regional Innovation Index 20 C+
Source: Author
vi
be tapped to promote Governor Raimondo’s budget agenda. Rhode Island does very well on the
Healthcare Index and this should be something that the state uses to target industries.
Part 2 explores the state of “Energy” and the environmental impact thereof, is in greater
detail. Rhode Island ranks first overall on the Energy Index. The state also ranked third, with
Oregon and Vermont, on the 2014 American Council for an Energy-Efficient Economy (ACEEE)
scorecard. However, both the Energy Index, based on data from a single year (2012, the most
current for available data) as well as the ACEEE scorecard, also based on annual changes, offers
a short-term perspective on the state’s environmental and energy use record. In contrast, this
segment applies a necessary long-term lens to understand the relationship between economic
growth, energy use, and carbon dioxide (CO2) emissions in the state. A detailed case study on
Rhode Island’s participation in the CO2 cap and trade program titled Regional Green House Gas
Initiative (RGGI) advances the growth-energy analysis. Results from trend analyses conducted
using data from 1990-2012 (the last year of state level data availability) show economic growth
occurred in the state at the cost of higher levels of energy use and CO2 emissions which continued
into the first RGGI compliance period. This experience is unlike other RGGI neighbors whose
economic growth has been progressively less energy intensive. Based on analysis of electricity
price movements during the same period, the report concludes that the energy efficiency programs
currently being funded by the RGGI CO2 allowance auction proceeds may not be adequately
managing electricity demand in the state. A program review and scope adjustment is required.
Reallocating RGGI dollars over a diverse set of public investment priorities would incentivize
innovation in green technologies, attract business capital, grow the economy, create jobs, reduce
energy dependence and promote long run environmental sustainability.
vii
In part 3, using several reports in measuring the “Ease of Doing Business” index, this study
explores in detail the best and worst states in several categories. CNBC and Forbes studies give
states points based on their performance pertaining to a number of broad categories that range from
the cost of doing business, to access to capital. These reports prove that states with a friendly
business environment tend to attract more business activities than others, creating a competitive
advantage that ultimately spurs economic development. For the fourth year in a row, Rhode Island
ranked in the bottom two. The state’s poor performance in Workforce (including education level,
unionization, and right to work policies), Economy, and Business Friendliness coupled with the
worst score in the Infrastructure and Transportation category led to the lowest overall score among
all states.
Recommendations
General
1. Develop a clear plan to capitalize the generation of ideas in Rhode Island and on the high
quality of education and expand educational opportunities, particularly in Science,
Technology, Engineering, and Math, by creating special innovation districts with
appropriate business development tools and infrastructure to foster economic
development. Two innovation districts in the former Route 195 land and in Quonset
should be the initial sites developed with future sites located in other areas of the state.
These innovation districts should lead the state, and the country, to developing ideas and
products for a green energy economy.
2. Use the high quality of healthcare and the investment in research, to make Rhode Island’s
a hub of high quality medical care in areas not served by nearby centers of excellence in
viii
Boston and New York. By working with the leading healthcare providers, Lifespan, Care
New England, Brown University Medical School, Rhode Island must work to continue
to expand healthcare as an economic development engine.
3. Develop a clear system to improve quality of life and prosperity in Rhode Island by
making housing more affordable, increasing employment, increasing wages, and
expanding opportunities for all Rhode Islanders. Use tax credits to target specific
development projects and entrepreneurs, redevelop and improve infrastructure including
transit hubs that serve high growth communities or communities with large underserved
populations, streamline governmental services and improve government accountability
(including ethics reform), and expand educational opportunities to improve overall
quality of life.
Energy
4. Rigorously assess the returns on energy efficiency programs currently financed with
RGGI funds to understand their effectiveness at the margin and inform long term
program priorities such as investments on demand side management strategies. The
preliminary long term analysis presented raises important questions about the overall
efficacy of Rhode Island’s current suite of energy efficiency programs in addressing long
term policy goals including (1) to what extent are existing EE programs effectively
managing electricity consumption, demand, and prices? (2) Were post 2012 gains in
lower electricity sales and cost savings made independent of the lag effect of the
economic slowdown that hit the state hard? (3) What other energy efficiency programs
should Rhode Island fund for broader long term program success?
ix
5. Rigorously assess and consider distributing RGGI funds over more program categories,
particularly renewable energy and public transportation initiatives in the near to medium
term, for a blended investment approach shown to maximize net investment benefits in
other states. RI should consider diversifying its public investment portfolio to include
programs such as renewable energy, promoting clean public transportation, worker
retraining, bill assistance or a combination of these strategies based on rigorous regional
economic modeling for the state and its own medium and long-term goals for economic
growth, energy use, environmental sustainability, and social equity. The blended
approach is shown to maximize long term emissions reductions, output and jobs growth.
6. Assess current strengths and position the state to reap the benefits of potential expansion
of RGGI to include states outside the current consortium looking to meet the EPA’s new
Clean Power Plan standards. Rhode Island should be prepared to leverage its
programmatic and institutional experience with cap and trade programs in general to
quickly and seamlessly transition to a larger CO2 auction market with higher revenue
earning potential as other states look to RGGI to fulfill EPA’s Clean Power Plan goals
that regulates CO2 emissions from the power sector nationwide. Potential linking of
RGGI with California’s AB32 program could earn even higher revenue if the state is
prepared to take advantage of these changes.
Ease of Doing Business
7. Build a robust business ecosystem by altering the corporate tax rate, franchise tax, and
other tax incentives to encourage private investment, especially from small and medium
enterprises. Offer entrepreneurial services, connect entrepreneurs with banks and venture
capitalists, and reduce the prerequisites needed. Improve upon transportation services
x
especially improving T.F. Green airport services domestically and internationally, and
creating hubs for Taxi/Bus/Train in other parts of RI.
8. Promote Rhode Island as a state where businesses can flourish by cultivating industry
branding, create a marketing strategy for struggling sectors, coordinate efforts to promote
Rhode Island’s successful companies, encourage foreign direct investment (FDI) by
creating Special Economic Mega Zones (SEMZs) and/or Free Economic Zones (FEZs),
and create a business friendly one-stop E-Commerce site for small business startups and
firms intending to export.
9. Provide education and training opportunities for low-skilled workers and take advantage
of existing university programs to activate the high-skilled labor force. Consolidate,
streamline and improve the quality of education in the public school system.
STRATEGIES FOR A COMPETITIVE RHODE ISLAND: ASSESSING INNOVATION
POTENTIAL WITH EMPHASIS ON ENERGY AND EASE OF DOING BUSINESS
Research Question
How can Rhode Island be regionally and nationally competitive? To answer this complex
question, our collaborative research team started with the first three original questions provided by
policy leaders on regional competitiveness, focusing specifically on energy initiatives, non-
monetary incentives, and factors influencing business development and location/relocation.1 We
developed a unique framework to first, individually and rigorously, analyze each of these issues,
then explore the synergies across them for a holistic approach to regional competition. Our ultimate
goal for this research analysis project is to provide an index or report card of Rhode Island’s
capacity for innovation. Beyond that, two critical and overlapping, albeit broad, dimensions:
energy and ease of doing business were emphasized as specific case studies where Rhode Island
can make significant efforts with tangible results. Understanding where Rhode Island falls on key
metrics of innovation is critical to elevating the state regionally and nationally including keeping
and attracting new businesses and citizens. The energy component is important because it also
offers an understanding of how the Ocean State might innovate to be more competitive in the long-
run, particularly in light of recent federal energy mandates and concern for the economics of
climate change mitigation and adaptation.2 Finally, Rhode Island is plagued by a stunted business
1 See “2014/2015 Research Questions Posed by Policy Leaders” presented at the initial Collaborative working group meeting on June 24, 2014. 2 See International Panel on Climate Change (IPCC), “Summary for Policymakers: Climate Change 2014: Mitigation of Climate Change,” (2014), http://report.mitigation2014.org/spm/ipcc_wg3_ar5_summary-for-policymakers_approved.pdf and “Summary for Policymakers: Climate Change 2014: Impacts, Adaptation, and Vulnerability,” (2014), http://ipcc-wg2.gov/AR5/images/uploads/WG2AR5_SPM_FINAL.pdf
2
climate and understanding how stunted it is will allow policy makers the evidence to implement
meaningful change.
1. Assessing Innovation Potential (Joseph W. Roberts, Principal Investigator)
Providence, and by extension, Rhode Island often receives praise for a high quality of life3
but Rhode Island is suffering from slow economic growth4 and out-migration of people.5 Why
does Rhode Island suffer so? Why does Rhode Island seem to lag behind her neighbors in the
region? What steps must Rhode Island take to become competitive in a complex global economy?
In December 2004, The Council on Competitiveness held the National Innovation Summit in
Washington, D.C. as the culmination of fifteen months of meetings and discussions seeking to
encourage innovation in the United States to allow the country to remain at the forefront of the
global economy. In 2005, the Council published the “Innovate America: National Innovation
Initiative Summit and Report,” which outlined the critical recommendations of the committees and
a blueprint to strengthen the U.S. economy in all areas.6 In conjunction with this effort, the Council
on Competitiveness also prepared the “Measuring Regional Innovation: A Guidebook for
Conducting Regional Innovation Assessments,” for the Economic Development Administration of
3 See for example Livability which ranks Providence the #2 downtown for 2014 (http://livability.com/top-10/top-10-best-downtowns-2014/providence-/ri), Travel and Leisure Magazine which ranks Providence the #2 best city for food snobs (http://www.travelandleisure.com/articles/americas-best-cities-for-foodies), or Architectural Digest naming Providence the country’s best small city (http://www.architecturaldigest.com/ad/travel/2014/providence-rhode-island-guide-hotels-restaurants-shops-article). 4 Scott Cohn, “Bottom State Rhode Island Struggles to Move the Needle,” CNBC (June 24, 2014). http://www.cnbc.com/id/101766880#. 5 J. Scott Moody and William J. Felkner, “Leaving Rhode Island: Policy Lessons from Rhode Island’s Exodus of People and Money,” Providence, R.I.: Ocean State Policy Research Institute, 2011. http://www.rifreedom.org/wp-content/uploads/OSPRI_LeavingRI_FINAL.pdf 6Council on Competitiveness, “Innovate America: National Innovation Initiative Summit and Report,” (Washington, DC: Council on Competitiveness, 2005). http://www.compete.org/images/uploads/File/PDF%20Files/ NII_Innovate_America.pdf.
3
the U.S. Department of Commerce.7 Both “Innovate America” and “Measuring Regional
Innovation” argue that innovation breeds productivity which, in turn, fosters prosperity. “The
‘Clusters of Innovation’ project showed that regions that embrace innovation and productivity as
the foundation of economic development strategy are the most successful.”8 The cover of
“Innovate America” lists ten key challenges for states on the path to creating an innovation
economy:
educate next-generation innovators; deepen science and engineering skills; explore knowledge intersections; equip workers for change; support collaborative creativity; energize entrepreneurship; reward long-term strategy; build world class infrastructure; invest in frontier research; attract global talent, and create high wage jobs.9
Two key questions guided this section: Where does Rhode Island fall on key dimensions of
innovation? What is Rhode Island’s position relative to its peers in terms of innovation and
competitiveness? In order to change the course of Rhode Island’s economic future, policy makers
must know what the state does well and what it does poorly, particularly on the innovation front.
For Rhode Island to develop its economy it must discover and improve its relative position vis-à-
vis its regional peers and other states across the country. In fact, “Measuring Regional Innovation”
suggests that the exercise is important “to develop a strong set of hypotheses about regional
strengths and weaknesses.”10 Of course, here we are working on state strengths and weaknesses.
The working groups that preceded the “Innovate America” report proposed development of three
critical areas as the foundation of innovation in the 21st century global economy: “1. Talent — ‘the
7 Council on Competitiveness, “Measuring Regional Innovation: A Guidebook for Conducting Regional Innovation Assessments,” (Washington, DC: Council on Competitiveness, 2005). http://www.compete.org/images/uploads/ File/PDF%20Files/Regional_Innovation_Guidebook.pdf. 8 Ibid., p. 14. 9 Council on Competitiveness, “Innovate America,” cover. 10 Council on Competitiveness, “Measuring Regional Innovation,” p. 20.
4
human dimension of innovation;’ 2. Investment — ‘the financial dimension of innovation;’ 3.
Infrastructure — ‘both the physical as well as legal and policy.’”11
Methodology
Building on the metrics proposed in the “Measuring Regional Innovation,” data from public
and private sources was collected on eight distinct dimensions or Component Indices: Human
Capital, Economic Capital, Business Environment, Energy, Quality of Life, Healthcare, Ideas, and
Prosperity. For each Component Index, the data addressing that particular metric can be thought
of as a sub-dimension. The measured metrics (and sources) for each component index are shown
in Appendix A. For each metric, every state was ranked by using an average rank system.12 Next,
the individual metric ranks were averaged to create a cumulative Index for each component.
Finally, each state’s Component Index was then ranked and letter grade was assigned for every
state plus the District of Columbia.13 An overall Regional Competitiveness Composite Index was
calculated as the average of each of the Component Indices. The composite was then ranked and
a grade was assigned as on the sub-dimension indices.
11 Council on Competitiveness, “Innovate America,” p. 19. 12 In an average rank system, if more than one states has the same rank, the average of the states is returned. For example, if two states have the same score but would be ranked 6 and 6a (spot 7 in the ranking) the average is returned (or 6.5). 13 Grades were assigned based on the following: Rank 1-4 — A, Rank 4.5-6 — A-, Rank 6.5-9 —B+, Rank 9.5-12 —B, Rank 13.5-15 — B-, Rank 15.5-20 — C+, Rank 20.5-33 —C, Rank 33.5-38 — C-, Rank 38.5-41 —D+, Rank 41.5-44 — D, Rank 44.5-47 — D-, Rank 47.5-51 — F. The District of Columbia data is incomplete on many metrics but was included where possible.
5
Rhode Island and Comparative Regional Results
Table 1.1 shows that Rhode Island’s rank and corresponding letter grade on each of the eight
indices of regional innovation is, as expected, mixed. Rhode Island is above average on the Ideas
and the Human Capital Indices; average on the Prosperity and Quality of Life Indices; and below
average on the Economic Capital, Business Environment, and Healthcare Indices.
Table 1.1: Rhode Island and Grade on Regional Innovation Sub-Indices
Innovation Index Rank Grade Human Capital 14 B- Economic Capital 45 D- Business Environment 49 F Energy 1 A Quality of Life 28.5 C Healthcare 9 B+ Ideas 6.5 B+ Prosperity 26 C
Source: Author
In the 1950s, the Department of Commerce looked at the regional breakdown used in federal
data and sought to build regions based on statistical similarities rather than historical connections.14
While the Census Bureau still uses the other, more traditional regional breakdown, other data
sources including the Bureau of Economic Analysis use the more statistically valid but less
common Department of Commerce alignment. For this study, the Department of
Commerce/Bureau of Economic Analysis regions are used because of the connection to the energy
data discussed by Dr. Basu in Part 2 below. Only two states in the nine state Northeast Region,
Maine and New Jersey fare worse than Rhode Island on the Regional Innovation Composite Index.
As Table 1.2 shows, Rhode Island has a Regional Innovation Index of 22.38 which ranks 20th
14 U.S. Census Bureau, Geographic Areas Reference Manual, (Washington, D.C.: U.S. Government Printing Office, 1994), 6-18-6-19.
6
nationally with a grade of C+. Rhode Island can find several positive forces at work in these
regional rankings. Rhode Island ranks first nationally in the Energy Index which is a function of
consumption, cost, and environmental impact. However, the portrait that the index paints is only
a singular snapshot. The longer trends are discussed in much more detail in Part 2 below. The
Human Capital Index shows that all Northeast and Mideast Region states are in the top twenty
nationally. While Rhode Island is only fifth best in the Northeast Region, it is fourteenth nationally.
Equally important, and related, on the Ideas Index, Rhode Island is fourth in the Northeast Region
and tied for sixth nationally. The Human Capital and Ideas Indices are related in that higher levels
of education, key metrics in the Human Capital Index, are needed to stimulate research and
development, key metrics in the Ideas Index. No state in the Northeast Region fares particularly
well on the Business Environment Dimension. In both regions under study here, only Delaware in
the Mideast Region ranks in the top 20 nationally. This is one area that Rhode Island could reform
aggressively to outcompete its neighbors. Dr. Mohan will explore this more fully in Part 3.
Table 1.2: Regional Innovation Composite for Northeast Region and Mideast Region States
State Name
Human Capital Index
Economic Capital Index
Business Environment
Index
Energy Index
Quality of Life Index
Healthcare Index
Ideas Index
Prosperity Index
Regional Innovation Index
Ran
k 20
14
Gra
de 2
014
Ran
k 20
14
Gra
de 2
014
Ran
k 20
14
Gra
de 2
014
Ran
k 20
14
Gra
de 2
014
Ran
k 20
14
Gra
de 2
014
Ran
k 20
14
Gra
de 2
014
Ran
k 20
14
Gra
de 2
014
Ran
k 20
14
Gra
de 2
014
Inde
x (A
vera
ge R
ank)
Ran
k 20
14
Gra
de 2
014
Massachusetts 2 A 5 A- 29.5 C 6 A- 3 A 2 A 1 A 5 A- 6.69 1.0 A New Hampshire 5 A- 40 D+ 32 C 9.5 B 9.5 B 2 A 3 A 3 A 13.00 3.0 A Connecticut 1 A 31 C 46 D- 4.5 A- 9.5 B 6 A- 2 A 16 C+ 14.50 5.0 A- New York 8 B+ 1.5 A 43 D 4.5 A- 21.5 C 19 C+ 6.5 B+ 31 C 16.88 8.0 B+ Maryland 3 A 35 C- 41 D+ 15 B- 15.5 C+ 17 C+ 10.5 B 12 B 18.63 11.0 B Vermont 7 B+ 33 C 47 D- 7 B+ 12 B 2 A 13 B 36 C- 19.63 12.0 B Delaware 10 B 44 D 16 C+ 19 C+ 41 D+ 10 B 15.5 C+ 10 B 20.69 15.0 B- DC 33 C 26 C * * 3 A * * 21 C 15.5 C+ 28 C 21.08 17.0 C+ Pennsylvania 18.5 C+ 21.5 C 36 C- 20 C+ 19 C+ 22 C 17 C+ 21 C 21.88 19.0 C+ Rhode Island 14 B- 45 D- 49 F 1 A 28.5 C 9 B+ 6.5 B+ 26 C 22.38 20.0 C+ New Jersey 6 A- 21.5 C 50 F 26 C 17 C+ 15 B- 28 C 23 C 23.31 24.0 C Maine 16 C+ 47 D- 44 D 18 C+ 19 C+ 7 B+ 48 F 41 D+ 30.00 36.0 C-
Source: Author Calculations Note: Regions are coded here as follows: Northeast Region and Mideast Region.
8
Component Index Results for the Regional Innovation Index
The “Guidebook” served as a model for creating the Regional Innovation Index not a
blueprint. Several of the metrics discussed in Appendix A of “Measuring Regional Innovation”
overlap one another. Moreover, there are several key metrics that are not included in the metrics
provided in “Measuring Regional Innovation.” The author has tried to create as comprehensive an
Index as possible with publicly available data. Because of cost constraints, no private data was
purchased for this project.
Human Capital Index
Human capital is the “accumulated stock of skills and talents, and it manifests itself in the
educated and skilled workforce in the region.”15 Education is the central element of human
capital.16 Adeyemi Ogunade argues that human capital development is essential economic growth
in the developing world. 17 The argument does not just apply to the developing world, however.
Any state that wants to increase its prominence in the regional, national, or global economic system
must develop human capital. The Human Capital Index seeks to measure quantify the level of
education in each state by looking at graduation rates for both high school and university.
Additionally, the percent of the population that has a high school diploma or higher and a
bachelor’s degree or higher are included along with the number of residents with a doctorate.
Equally important, are the costs of obtaining those degrees including public financing at both K-
15 Vijay K. Mathur, “Human Capital-Based Strategy for Regional Economic Development,” Economic Development Quarterly 13, No. 3 (1999), 205. 16 See, for example, Catherine M. Sleezer, Gary J. Conti, and Richard E. Nolan, “Comparing CPE and HRD Programs: Definition, Theoretical Foundations, Outcomes, and Measures of Quality,” Advances in Developing Human Resources 6, No. 1 (2003), 20-34. 17 Adeyemi O. Ogunade, “Human Capital Investment in the Developing World: An Analysis of Praxis,” Kingston, Rhode Island: Schmidt Labor Research Center Seminar Paper Series, University of Rhode Island (2011), http://www.uri.edu/research/lrc/research/papers/Ogunade_Workforce_Development.pdf.
9
12 level and university levels. Higher education funding, is even more critical in the advanced
economy of the twenty-first century because many more employment opportunities require such
degrees. To that end, the funding trends for higher education over previous years is also included.
Private school data is not included because there are simply too many institutions to gather data
effectively. Finally, twenty first century skills include computer proficiency so the metrics of
households with computer and households with broadband are also included.
Rhode Island fares well on many of the metrics in this index (Table 1.3). However, there is
room for improvement especially in the areas of high school graduation rate and overall higher
education funding. Understandably, tight budgets in Rhode Island have made investments in
education difficult but Rhode Island has increased funding over a five year period at a rate greater
than most states. This trend should continue and, in fact, should increase over the next several
years. Improving human capital will only improve Rhode Island’s chances of developing a rich,
vibrant, and productive economic environment. Employers want a skilled and well educated
workforce. Rhode Island does well here but can continue to improve. For once, the small size of
Rhode Island may be to its advantage because the money invested can have direct tangible benefits
over a smaller footprint.
Table 1.3: Human Capital Index and Metrics
State Name
Hig
h Sc
hool
Gra
duat
ion
Rat
e R
ank
Uni
vers
ity G
radu
atio
n R
ate
Ran
k
Am
ount
of D
ebt P
ost C
olle
ge
Ran
k
Perc
enta
ge o
f Gra
duat
es w
ith
Deb
t Ran
k
Ph.D
. Gra
duat
es 2
012/
Cap
ita
Ran
k
Perc
ent H
S G
radu
ate
or H
ighe
r R
ank
Perc
ent B
ache
lor'
s Deg
ree
or
Hig
her
Ran
k
K12
Edu
catio
n E
xpen
ditu
re (p
er
Pupi
l) R
ank
Hig
her
Ed
App
ropr
iatio
ns p
er
FTE
FY
201
3 In
dex
to U
S A
vera
ge R
ank
Hig
her
Ed
App
ropr
iatio
ns p
er
FTE
Fiv
e Y
ear
% C
hang
e (F
Y08
-FY
13) R
ank
Perc
ent o
f Hou
seho
lds w
ith
Com
pute
r R
ank
Hou
seho
lds W
ith a
Bro
adba
nd
Inte
rnet
Sub
scri
ptio
n R
ank
Hum
an C
apita
l Ind
ex
Hum
an C
apita
l Ind
ex R
ank
2014
Hum
an C
apita
l Gra
de 2
014
Connecticut 15.0 7.0 6.0 16.0 12.0 21.0 5.0 5.0 11.0 31.0 19.0 11.0 13.25 1.0 A Massachusetts 15.0 14.5 14.0 13.0 2.0 19.0 2.0 8.0 25.0 32.0 14.0 3.0 13.46 2.0 A Maryland 15.0 6.0 26.0 28.0 6.0 25.0 4.0 11.0 13.0 18.0 8.0 7.0 13.92 3.0 A New Hampshire 6.5 3.0 1.0 1.0 42.0 2.0 9.0 12.0 50.0 50.0 4.0 1.0 15.13 5.0 A- New Jersey 15.0 9.0 18.0 4.0 39.0 28.0 6.0 4.0 27.0 30.0 13.0 5.0 16.50 6.0 A- Vermont 2.5 4.0 22.0 16.0 46.0 11.0 8.0 6.0 49.0 8.0 16.0 18.0 17.21 7.0 B+ New York 32.0 13.0 25.0 26.0 9.0 39.0 10.0 1.0 6.0 6.0 25.0 19.0 17.58 8.0 B+ Delaware 27.5 1.0 2.0 21.0 5.0 30.0 20.0 10.0 34.0 25.0 18.0 20.0 17.79 10.0 B Rhode Island 32.0 18.0 4.0 9.0 3.0 36.0 13.0 9.0 43.0 28.0 29.0 14.0 19.83 14.0 B- Maine 10.5 26.0 7.0 16.0 51.0 5.0 26.0 14.0 22.0 9.0 28.0 29.0 20.29 16.0 C+ Pennsylvania 15.0 10.0 3.0 3.0 11.0 24.0 23.0 13.0 46.0 36.0 41.0 31.0 21.33 18.5 C+ District of Columbia 51.0 51.0 47.0 44.0 1.0 17.0 1.0 2.0 51.0 * 20.0 24.0 28.09 33.0 C
Sources: Author Calculations from Department of Education, Chronicle of Higher Education, American Community Survey 2013, Project on Student Debt, State Higher Education Executive Officers Association. Note: Regions are coded here as follows: Northeast Region and Mideast Region.
11
Economic Capital Index
In a classic article challenging the prevailing assumptions of the late 1960s development
literature, Sayre P. Schatz argued that capital accumulation was the necessary condition to
economic development.18 Economic capital refers to the financing available to undertake projects
to increase productivity. This index looks at the totality of investments (through five and ten year
venture capital investments). Admittedly, this is not the entirety of capital accumulation in a given
state but it does serve as a nice connection between the capital markets and the economic engine
of a given state. More investment generally means more economic activity. This index also
includes labor force productivity, exports, and export growth. While at first glance, these would
seem to be an ill fit for an index of economic capital, all three metrics serve to highlight how the
economic might of individual citizens (productivity) along with the state’s economic might
(exports). Capital accumulation and economic productivity are intertwined. Including both
dimensions here made the most sense.
As Table 1.4 shows, Rhode Island does not do particularly well in this area for many reasons.
First, much of the venture capital available in the market goes to only a handful of states. As Rhode
Island develops leading industries for the twenty first century, more of that venture capital could
come here and further boost the economy. Second, Rhode Island is a small state geographically
with scarcely more than one million people. One would hope that the population is highly
productive. Rhode Island, however, is in the bottom quartile nationally and fourth in the Northeast
Region. This is a metric that must improve for Rhode Island to develop to its full potential. Finally,
as a small state, Rhode Island cannot be expected to have a high level of exports unless the
18 Sayre P. Schatz, “The Role of Capital Accumulation in Economic Development,” Journal of Development Studies 5, No. 1 (1968).
12
economy were structured to produce those exports. Historically, Rhode Island produced textiles or
jewelry and this may have led to higher exports but neither are viable for the future. High tech or
green technology exports may be better suited to the future but Rhode Island may never compete
with larger manufacturing states for exports.
Table 1.4: Economic Capital Index and Metrics
State Name
5 Y
ear
VC
Fun
d C
omm
itmen
ts,
2009
-201
3 (P
erce
nt o
f Tot
al) R
ank
10 Y
ear
VC
Fun
d C
omm
itmen
ts,
2004
-201
3 (P
erce
nt o
f Tot
al) R
ank
Lab
or F
orce
Pro
duct
ivity
Com
poun
d A
nnua
lized
Gro
wth
, 200
9-20
13 R
ank
2013
Tot
al E
xpor
ts R
ank
Gro
wth
Tot
al E
xpor
ts,
2012
-201
3 R
ank
Economic Capital Index
Economic Capital Index Rank 2014
Economic Capital Grade 2014
New York 3.0 2.0 17.0 3.0 5.0 6.00 1.5 A Massachusetts 2.0 3.0 11.0 17.0 11.0 8.80 5.0 A- New Jersey 16.0 20.0 32.0 9.0 39.0 23.20 21.5 C Pennsylvania 12.0 14.0 30.0 11.0 49.0 23.20 21.5 C District of Columbia 28.0 29.0 * 36.0 12.0 26.25 26.0 C Connecticut 33.0 34.0 42.0 21.0 14.0 28.80 31.0 C Vermont 31.5 35.0 8.0 42.0 32.0 29.70 33.0 C Maryland 35.0 37.0 29.0 30.0 33.0 32.80 35.0 C- New Hampshire 45.0 43.0 25.0 41.0 18.0 34.40 40.0 D+ Delaware 45.0 49.0 47.0 38.0 17.0 39.20 44.0 D Rhode Island 37.0 38.0 39.0 47.0 37.0 39.60 45.0 D- Maine 45.0 40.0 45.0 45.0 28.0 40.60 47.0 D-
Source: Author Calculations from 2014 National Venture Capital Association Yearbook, HBS/US Economic Development Agency Cluster Mapping Project, US Census. Note: Regions are coded here as follows: Northeast Region and Mideast Region.
13
Business Environment Index
Table 1.5: Business Environment Index and Metrics
State Name
Ove
rall
Tax
Bur
den
Ran
k
Forb
es O
vera
ll C
ost o
f D
oing
Bus
ines
s Ran
k
C2E
R
Cos
t of L
ivin
g In
dex
Q3
2014
Ran
k
Business Environment
Index
Business Environment Index Rank
2014
Business Environment Grade 2014
Delaware 13.0 11.0 36.5 20.17 16.0 C+ Massachusetts 25.0 13.0 43.0 27.00 29.5 C New Hampshire 8.0 35.0 39.5 27.50 32.0 C Pennsylvania 24.0 30.0 33.5 29.17 36.0 C- Maryland 41.0 20.0 39.5 33.50 41.0 D+ New York 50.0 17.0 46.0 37.67 43.0 D Maine 29.0 49.0 38.0 38.67 44.0 D Connecticut 42.0 36.0 50.0 42.67 46.0 D- Vermont 45.0 43.0 41.0 43.00 47.0 D- Rhode Island 46.0 46.0 42.0 44.67 49.0 F New Jersey 49.0 41.0 45.0 45.00 50.0 F District of Columbia * * 49.0 49.00 * *
Source: Author Calculations from State Business Tax Climate, Tax Foundation, Forbes Magazine, and Council for Community & Economic Research (C2ER). Note: Regions are coded here as follows: Northeast Region and Mideast Region.
The Business Environment Index (Table 1.5) might also be referred to as the cost of doing
business index. Businesses seek to minimize costs for the firm as well as for their employees.
Taxes are a fixed cost of doing business and the overall tax burden, which takes into account both
taxes for firms as well as taxes for individuals, is a good metric to measure how tax friendly a state
is. Taxes are necessary to provide services but businesses (and the individuals they employ) want,
and expect, efficiency in taxation policy. The Forbes Magazine Cost of Doing Business Rank is a
respected measure. Finally, the Council for Community and Economic Research calculates a cost
14
of living index. This comprehensive look at how much it costs to live in a given state is important
because states that are more cost effective are more desirable for employees. A lower cost of living
means that the money that employees earn provides them with a higher quality of life. Dr. Mohan
will examine the cost of doing business using these, and other metrics, in Part 3 below.
Energy Index
Energy is critical to economic development. However, the environmental and financial costs
of traditional energy sources will threaten any such development. The Energy Index looks at a
single point in time to show how well a state manages its energy needs including the environmental
costs of that energy. The Energy Index is a function of energy consumption per capita across
residential, commercial, industrial, and transportation sectors as well as energy expenditures per
capita. Per capita measures are critical to account for the relative size of states. These measures
gauge how much energy a state uses and how much it pays for it. Additionally, CO2 emissions are
used as a measure of the environmental impact of energy policy in a state. The index does not
include a production variable because so many states have little or no energy production (including
RI). However, as states innovate more in the area of green energy to meet their energy needs, a
production variable will be necessary.
Table 1.6: Energy Index and Metrics
State Name
Res
iden
tial S
ecto
r E
nerg
y C
onsu
mpt
ion
per
Cap
ita, 2
012,
M
illio
n B
TU
Ran
k
Com
mer
cial
Sec
tor
Ene
rgy
Con
sum
ptio
n pe
r C
apita
, 201
2,
Mill
ion
BT
U R
ank
Indu
stri
al S
ecto
r E
nerg
y C
onsu
mpt
ion
per
Cap
ita, 2
012,
M
illio
n B
TU
Ran
k
Tra
nspo
rtat
ion
Sect
or E
nerg
y C
onsu
mpt
ion
per
Cap
ita, 2
012,
M
illio
n B
TU
Ran
k
Tot
al E
nerg
y C
onsu
mpt
ion
per
Cap
ita, 2
012,
Mill
ion
BTU
Ran
k
Tot
al E
nerg
y E
xpen
ditu
res p
er
Cap
ita, 2
012,
$ R
ank
Tot
al C
O2
Em
issi
ons,
2011
, M
illio
n M
etri
c T
ons R
ank
Energy Index
Energy Index Rank 2014
Energy Index Grade 2014
Rhode Island 8.0 5.0 3.0 3.0 1.0 5.0 3.0 4.00 1.0 A District of Columbia 4.0 51.0 1.0 1.0 16.0 2.0 1.0 10.86 3.0 A Connecticut 20.0 14.0 4.0 4.0 5.0 19.0 11.0 11.00 4.5 A- New York 3.0 24.0 2.0 2.0 2.0 1.0 43.0 11.00 4.5 A- Massachusetts 14.5 4.0 11.0 5.0 7.0 14.0 22.0 11.07 6.0 A- Vermont 11.0 2.0 8.0 19.0 6.0 36.0 2.0 12.00 7.0 B+ New Hampshire 14.5 12.0 7.0 15.0 9.5 29.0 7.0 13.43 9.5 B Maryland 24.0 42.5 5.0 11.0 12.0 13.0 19.0 18.07 15.0 B- Maine 12.0 7.0 24.0 25.0 22.0 41.0 8.0 19.86 18.0 C+ Delaware 22.5 37.0 28.0 7.0 24.5 26.0 4.0 21.29 19.0 C+ Pennsylvania 22.5 8.0 25.0 10.0 21.0 21.0 49.0 22.36 20.0 C+ New Jersey 16.0 41.0 9.0 35.0 15.0 28.0 36.0 25.71 26.0 C
Source: Author Calculations from State Energy Data System (SEDS) U.S. Energy Information Administration's (EIA). Note: Regions are coded here as follows: Northeast Region and Mideast Region.
16
Using the most current data, from 2012, Table 1.6 shows that Rhode Island’s ranks no worse
than eighth on any of the consumption metrics and first for total consumption. Rhode Islanders’
can be commended for their frugal use of energy. Rhode Island ranks fifth on energy expenses and
third on CO2 emissions. Overall, Rhode Island is ranked first nationally in the Energy Index. As
will be clearer in Part 2, this snapshot is somewhat misleading. In 2012, Rhode Island was
outstanding on energy variables but the trends, particularly in greenhouse gas emissions are not as
good. The key to Rhode Island remaining at the top of the Energy Index is to develop a
comprehensive energy plan that continues to build on the success of 2012. Rhode Island’s
investment in Ocean State Wind is a promising start in this area.
Quality of Life Index
Quality of life is how well citizens live in their community and how residents perceive of
how well they live. In essence, quality of life reflects how residents think about living in a given
state. Obviously, quality of life is a key determinant of why residents stay and more importantly
why others might choose to move into a new state. The metrics in the Quality of Life Index (Table
1.7) include two distinct measures of the quality of life in a given state. Gallup-Healthways is a
national survey that seeks to gauge citizen well-being on five dimensions: Purpose, Social,
Financial, Community, and Physical. According to Gallup-Healthways, the five dimensions are
defined as follows:
Purpose: Liking what you do each day and being motivated to achieve your goals
Social: Having supportive relationships and love in your life
Financial: Managing your economic life to reduce stress and increase security
Community: Liking where you live, feeling safe and having pride in your community
17
Physical: Having good health and enough energy to get things done daily19
These are combined to create an overall index score which is then ranked. It is the ranking
that is reported here. The Forbes Magazine Quality of Life Rank is part of the magazine’s larger
project on business environment. Here only the Quality of Life ranking is used. Forbes’ Quality
of Life metric uses poverty, crime rates, cost of living, school test performance, health, cultural
and recreational opportunities, the weather (using mean temperature), and the number of top
colleges in the state.20
Table 1.7: Quality of Life Index and Metrics
State Name Gallup-Healthways Well-Being Index
Overall Rank
Forbes Quality of Life Rank
Quality of Life Index
Quality of Life Index Rank 2014
Quality of Life Grade
2014 Massachusetts 17.0 1.0 9.00 3.0 A Connecticut 24.0 3.0 13.50 9.5 B New Hampshire 21.0 6.0 13.50 9.5 B Vermont 13.0 18.0 15.50 12.0 B Maryland 29.0 8.0 18.50 15.5 C+ New Jersey 34.0 4.0 19.00 17.0 C+ Maine 15.0 27.0 21.00 19.0 C+ Pennsylvania 35.0 7.0 21.00 19.0 C+ New York 33.0 10.0 21.50 21.5 C Rhode Island 37.0 20.0 28.50 28.5 C Delaware 38.0 36.0 37.00 41.0 D+ District of Columbia * * * * *
Source: Author Calculations from Gallup/Healthways and Forbes Magazine Note: Regions are coded here as follows: Northeast Region and Mideast Region.
Rhode Island’s Quality of Life Index is at the low end of average. Looking deeper at the
Gallup-Healthways rankings, Rhode Island is in the bottom six on Purpose (49th), Social (50th),
19 Gallup-Healthways, “State of American Well-Being: 2014 State Well-Being Rankings,” Gallup-Healthways (2015), http://www.well-beingindex.com/subscribe. 20 Kurt Badenhausen, “Ranking The Best States For Business 2014: Behind The Numbers,” Forbes Magazine (November 12, 2014), http://www.forbes.com/sites/kurtbadenhausen/2014/11/12/ranking-the-best-states-for-business-2014-behind-the-numbers/
18
and Community (45th). Both Purpose and Community Rankings are surprises because Providence
routinely is named to “best of” lists. Of course, Rhode Island is much more than just Providence
but external perceptions of the capital city have not translated to perceptions locally. Both of these
can be changed by expanding economic opportunities and options for social and community
interaction. With a better economy and more to do, citizen satisfaction is sure to improve.
Similarly, on the Financial dimension (27th) can be improved as well. Rhode Island’s Physical
dimension rank of fourteen is belied by the relative high costs of healthcare (see below). Rhode
Islanders clearly believe that their health is good and that services are available to maintain that.
The Forbes Ranking places Rhode Island in the top twenty nationally.21
Healthcare Index
Healthcare quality and healthcare costs are equally important dimensions of the quality of
life and affordability of a state. Only one metric was used to create a Healthcare Index. Fortunately,
the Commonwealth Fund has created as comprehensive a look at overall health within the states
as possible. The report “assesses states on 42 indicators of health care access, quality, costs, and
outcomes over the 2007–2012 period, which includes the Great Recession and precedes the major
coverage expansions of the Affordable Care Act.”22 As the authors of the report indicate the
performance of the states represents a very muddled picture nationally. States are extremely
unequal in their access to good, reliable, and affordable healthcare.23 Fortunately, as shown in
Table 1.8, the Northeast is in a much better position regionally than any other region. As the
authors of the report suggest, the metrics used to calculate the overall health system performance
21 See Gallup-Healthways, “State of American Well-Being,” or data files associated with the project. 22 David Radley, Douglas McCarthy, Jacob Lippa, Susan L. Hayes, and Cathy Schoen, Aiming Higher: Results from a Scorecard on State Health System Performance, 2014, The Commonwealth Fund (May 2014), abstract. 23 Ibid., p. 7.
19
ranking can and should be used as “attainable benchmarks.”24 The report uses five broad
dimensions (Access and Affordability, Prevention and Treatment, Avoidable Hospital Use and
Cost, Healthy Lives, and Equity) to create the ranking system. Rhode Island is in the top quartile
on four of the five dimensions and in the second quartile on the Avoidable Hospital Use and Cost
dimension.25 Rhode Island should be proud of its healthcare system and should use this data as a
means to promote itself. Moreover, healthcare is one industry that is expanding. According to the
Bureau of Labor Statistics, healthcare jobs are among the fastest growing job sectors in the
economy at 2.6% from 2012-2022.26 Rhode Island should continue to use its high quality
healthcare system as a mechanism for economic growth.27
24 Ibid., 7 25 Ibid., 12. 26 Richard Henderson, “Industry employment and output projections to 2022,” Monthly Labor Review (December 2013), http://www.bls.gov/opub/mlr/2013/article/industry-employment-and-output-projections-to-2022-1.htm. 27 Adeeb Mahmud and Marcie Parkhurst. “The Role of the Health Care Sector in Expanding Economic Opportunity.” Cambridge, Massachusetts, (2007), http://www.ksg.harvard.edu/m-rcbg/CSRI/publications/ report_21_EO%20Health%20Care%20Final.pdf.
20
Table 1.8: Health Cost Index and Metrics
State Name
Health System
Performance Overall Rank
Healthcare Rank 2014
Healthcare Grade 2014
Massachusetts 2.0 2.0 A New Hampshire 2.0 2.0 A Vermont 2.0 3.0 A Connecticut 6.0 6.0 A- Maine 7.0 7.0 B+ Rhode Island 9.0 9.0 B+ Delaware 10.0 10.0 B New Jersey 15.0 15.0 C+ Maryland 17.0 17.0 C+ New York 19.0 19.0 C+ District of Columbia 21.0 21.0 C Pennsylvania 22.0 22.0 C
Source: Commonwealth Fund. Note: This is the only Index with a single metric so the Rank mirrors the singular metric. All other Indices were calculated and the Rank Average was used. Note: Regions are coded here as follows: Northeast Region and Mideast Region.
Ideas Index
If a state wants to build an economy for the rapidly changing new global environment, it is
critical that the state seek to operate at the forefront of emerging technology. Bruce Katz and Julie
Wagner suggest that innovation districts, “are geographic areas where leading-edge anchor
institutions and companies cluster and connect with start-ups, business incubators, and
accelerators. They are also physically compact, transit-accessible, and technically-wired and offer
mixed-use housing, office, and retail.”28 Providence, and by extension, Rhode Island, has a unique
opportunity to develop such a regional hub with the opening of the former Interstate 195 land. The
proximity of the state’s universities to the land, easy accessibility, and open space for specific
28 Bruce Katz and Julie Wagner, “The Rise of Innovation Districts: A New Geography of Innovation in America,” Washington, DC: Brookings Institute Metropolitan Policy Program, (May 2014), http://www.brookings.edu/ ~/media/Programs/metro/Images/Innovation/InnovationDistricts1.pdf.
21
development cannot be overlooked. The Ideas Index (Table 1.9) is based on two metrics (patents
per 100,000 population and total research and development spending per capita) as a means to
gauge how well a state is able to generate innovate new opportunities. The Ideas Index is built
around the generation of ideas as a function of population size so smaller states, like Rhode Island,
that are innovate can score well here. The Northeast region has five of the top ten states nationally,
including Rhode Island. This promising result for Rhode Island coupled with the relatively high
score on the Human Capital Index should be a cornerstone of any development strategy for the
state. Rhode Island must learn to leverage its high quality universities and innovative corporations
in areas that reflect a new global economy.
Table 1.9: Ideas Index and Metrics
State Name
Total Patents, 2013 (per 100,000
population) Rank
Total R&D Spending in All
Fields, 2013 (per capita)
Rank
Ideas Index
Ideas Index Rank 2014
Ideas Grade 2014
Massachusetts 2.0 3.0 2.50 1.0 A Connecticut 8.0 6.0 7.00 2.0 A New Hampshire 7.0 9.0 8.00 3.0 A New York 15.0 8.0 11.50 6.5 B+ Rhode Island 19.0 4.0 11.50 6.5 B+ Maryland 27.0 2.0 14.50 10.5 B Vermont 5.0 26.0 15.50 13.0 B Delaware 13.0 21.0 17.00 15.5 C+ District of Columbia 33.0 1.0 17.00 15.5 C+ Pennsylvania 25.0 10.0 17.50 17.0 C+ New Jersey 11.0 42.0 26.50 28.0 C Maine 39.0 50.0 44.50 48.0 F
Source: Author Calculations from US Patent and Trademark Office and WebCASPAR National Science Foundation. Note: Regions are coded here as follows: Northeast Region and Mideast Region.
22
Prosperity Index
Prosperity, or the financial success of citizens, is essential to building a strong state economy.
There are three broad dimensions that make up the Prosperity Index: Employment factors, Housing
Burden factors, and Income factors. States must have full employment so that all citizens can enjoy
the benefits of the economy. The Prosperity Index (Table 1.10) uses three distinct measures of
employment. The unemployment rate is the most basic measure of the employment situation in a
state. However, two other measures are also important. The first, the over year change in
unemployment, defined as the percent that the unemployment rate changed over the course of a
given year, measures how well a state is doing at lowering its unemployment rate. The second, the
over year change in non-farm employment (not seasonally adjusted) is a measure of the change in
the total employment of a state. More broadly, this can be seen as a suitable measure of how well
a state’s economy is growing by adding new jobs to the economy over the course of a given year.
Rhode Island does poorly on the unemployment rate but is the second best at lowering that rate.
The state is in the middle in terms of growing the overall economy.
The Housing Burden reflects the ability of residents to pay for their home (whether
ownership or rental). The standard for housing affordability in the United States is that the cost of
the home must not exceed 30% of a family budget. Anything over that would mean that the family
is housing burdened. The Northeast region does poorly on this metric generally. Rhode Island is
46th for homeowner burden and 39th for rental burden. HousingWorksRI is working on housing
affordability in Rhode Island and their efforts should be expanded.
Income factors are measured in four ways. By looking at individual, household, and family
income, the Index includes an extremely broad view of income. Individual income looks at the
personal income per capita for each state. Household income looks at the combination of two
23
income earners with comingled resourced. Family income incorporates the income of all members
of a family over the age of fifteen. Additionally, the poverty level looks at the bottom end of the
income scale. Holistically, these four measures encapsulate the entirety of the financial income
portrait of a state. The income picture in Rhode Island is unremarkable. Regionally, Rhode Island
ranks sixth on personal income and household income, fifth on family income, and tied for seventh
on poverty. Rhode Island family income shows that many Rhode Island families need the income
of all members of a household to make ends meet. Rhode Island’s lower than average incomes for
the region may make the state more attractive to business who can save on labor costs. This comes
at a price of quality of life and other measures of prosperity.
Table 1.10: Prosperity Index and Metrics
State Name
Une
mpl
oym
ent R
ate,
D
ecem
ber
2014
Ran
k
Une
mpl
oym
ent,
Ove
r th
e Y
ear
Cha
nge,
D
ec. 2
013-
Dec
. 201
4 R
ank
Tot
al N
on-F
arm
Em
ploy
men
t† O
ver
the
Yea
r C
hang
e,
Dec
. 201
3-D
ec. 2
014
(Per
cent
) Ran
k
Cos
t Bur
dene
d H
omeo
wne
rs (%
) R
ank
Cos
t Bur
dene
d R
ente
rs (%
) Ran
k
Pers
onal
Inco
me
per
capi
ta,
2013
Ran
k
Med
ian
Hou
seho
ld In
com
e,
2013
Ran
k
Med
ian
Fam
ily In
com
e, 2
013
Ran
k
Pove
rty
Rat
e, 2
013
Ran
k
Prosperity Index
Prosperity Index Rank 2014
Prosperity Grade 2014
New Hampshire 8.0 16.5 33.0 45.0 17.0 9.0 8.0 7.0 1.0 16.06 3.0 A Massachusetts 24.5 11.0 21.0 42.0 29.0 3.0 6.0 4.0 8.0 16.50 5.0 A- Delaware 21.5 27.0 8.0 34.0 33.0 23.0 11.0 14.0 11.0 20.28 10.0 B Maryland 24.5 33.0 48.0 38.0 36.0 6.0 1.0 1.0 2.0 21.06 12.0 B Connecticut 39.0 23.0 27.0 48.0 44.0 2.0 4.0 3.0 4.0 21.56 16.0 C+ Pennsylvania 18.0 7.5 41.0 28.0 31.0 19.0 23.0 21.5 19.0 23.11 21.0 C New Jersey 34.5 23.0 49.0 51.0 46.0 4.0 2.0 2.0 5.0 24.06 23.0 C Rhode Island 45.5 2.0 25.0 46.0 39.0 16.0 19.0 11.0 21.5 25.00 26.0 C District of Columbia 50.0 42.5 18.0 35.0 23.0 1.0 7.0 8.0 45.5 25.56 28.0 C New York 30.5 16.5 36.0 47.0 47.0 5.0 16.0 17.0 28.0 27.00 31.0 C Vermont 13.0 48.5 34.0 44.0 48.0 21.0 20.0 20.0 12.0 28.94 36.0 C- Maine 24.5 25.5 44.0 36.0 42.0 32.0 33.0 31.0 21.5 32.17 41.0 D+
Source: Author Calculations from Bureau of Labor Statistics, American Community Survey/Housing Works RI, and Bureau of Economic Affairs. †Non-Seasonally Adjusted. Note: Regions are coded here as follows: Northeast Region and Mideast Region.
Combined, these three dimensions show that Rhode Island is unremarkable. Rhode Island
ranks 26th nationally and 6th regionally with a grade of C. Rhode Island’s unemployment for a time
was the highest in the nation but that is improving dramatically over the last year. Rhode Island
must continue to grow the economy and increase the job opportunities available for her citizens.
Rhode Island is expensive for homeowners and renters alike and the state must do more to make
living in the state more affordable. One way to do that is to increase incomes, of course, and Rhode
Island lags behind her peers in this area. However, raising incomes too high too fast will cause
inflation and may make Rhode Island less attractive to business. There is a razor thin margin to
accomplish all of these tasks.
Conclusions and Recommendations
Rhode Island is not in as perilous shape as many pundits around the state would have us
believe. The positives are a relatively well-educated and competent workforce (Human Capital
Index), a sound healthcare system (Healthcare Index), and a dynamic idea oriented population
(Ideas Index). On each of these measures, Rhode Island can be proud of the accomplishments and
use these as building blocks for the future. It is imperative that leaders in Rhode Island, both
political and business, capitalize on these strengths to market to industry to stay in (or relocate to)
Rhode Island. At the same time, however, Rhode Island is not seen as business friendly (Business
Environment Index) and lacks a rich base of investments (Economic Capital Index). These are the
two areas of this report that should generate the most discussion within policy and business circles
in the state. To compete, Rhode Island must reform its business environment to be more compatible
with long-term economic growth. The final two Indices (Quality of Life and Prosperity) show
Rhode Island to be average. Improving perceptions of Rhode Island’s quality of life will go hand
in hand with improving economic prosperity. While money does not buy happiness, for too many
26
people, the lack of money means that they cannot enjoy the many benefits of the state which
negatively impacts quality of life.
Recommendations
Recommendation 1: Rhode Island must build on the success of its education system by
increasing investment in teachers, infrastructure, and curriculum. The state should develop a clear
plan to capitalize on the existing educated workforce and should actively seek to expand that
educated workforce to be more inclusive. Rhode Island has been effective at generating ideas and
the state should encourage the state’s universities to expand their efforts in this area by creating a
statewide network to further develop these ideas, particularly in Science, Technology,
Engineering, and Math (STEM), particularly in healthcare and green energy technology.
Recommendation 2: Rhode Island should create special innovation districts with
appropriate business development tools and infrastructure to foster economic development. Two
innovation districts in the former Route 195 land and in Quonset should be the initial sites
developed with future sites located in other areas of the state. These innovation districts should
lead the state, and the country, to developing ideas and products for the future. Again, green energy
and healthcare are logical areas for growth.
Recommendation 3: Rhode Island must capitalize on its high quality and affordable
healthcare system by making Rhode Island a center of medical care in the region. Rather than
duplicating or competing with the efforts of nearby centers of excellence in Boston or New York,
Rhode Island should seek to develop its own specialties. This should be combined with expansion
of the economic development opportunities through research. By working with the leading
healthcare providers, Lifespan, Care New England, Brown University Medical School, Rhode
Island must work to continue to expand healthcare as an economic development engine.
27
Recommendation 4: Rhode Island must improve quality of life and prosperity in Rhode
Island by making housing more affordable, increasing employment, increasing wages, and
expanding opportunities for all Rhode Islanders. Rhode Island could develop and implement
specifically targeted tax credits to encourage entrepreneurs and specific industries, particularly in
special innovation districts.
Recommendation 5: Rhode Island must improve infrastructure throughout the state
including building transit hubs that serve high growth communities or communities with large
underserved populations.
Recommendation 6: Rhode Island must streamline governmental services, particularly
those serving businesses, to minimize delay, expense, and confusion about regulations.
Comprehensive regulatory reform should also be done to streamline the process for business and
industry to invest in the state.
Recommendation 7: Rhode Island government must increase its accountability and
openness to the public. A comprehensive ethics reform package should be implemented to
demonstrate the responsibility of government officials and to create an open and dynamic state
government.
Recommendation 8: Rhode expand educational opportunities to all citizens. Consolidation
of schools to reduce costs and increase efficiency should be considered, subject to local community
wishes, of course. The state should increase funding to schools at all levels through a vibrant
statewide funding formula tied to the changing nature of the economy, particularly in STEM. The
state should consider building a dedicated statewide STEM magnet school to develop capable
workers for the new economy. The state should actively seek to retain college graduates in Rhode
Island through statewide internship or other co-curricular programs with business and industry.
28
2: Energy (Suchandra Basu, Principal Investigator)
Abundant, cheap, fossil fuel sources of energy have been a key driver of economic growth
since the industrial revolution. Production using traditional sources of energy release sulfur
dioxide, nitrous oxides, particulates, carbon dioxide and other harmful pollutants that damage the
environment and impact public health. The most concerning of these impacts is one of
accumulating stocks of CO2 in the earth’s atmosphere causing global warming and climate change,
now widely considered the most difficult policy challenge of our time. Finding sustainable, low
carbon intensive solutions is crucial for fuelling economic growth in the near and medium term to
reign in further warming. An emphasis on climate change adaptation in the medium to long term
will also be crucial in planning for and dealing with the myriad consequences of global warming
such as rising sea levels, coastal flooding, loss of biodiversity, temperature extremes, loss of
certain industries etc.
To be competitive in this scenario, Rhode Island, with other cities, states, regions and
countries must be a part of growing innovative solutions to reduce dependence on traditional
sources of energy. This segment applies a necessary long-term lens to understand the relationship
between economic growth, energy use, and carbon dioxide (CO2) emissions in the state using data
from 1990 to 2012. The goal is to appraise Rhode Island’s current standing on energy initiatives
compared to neighbors and explore potential new energy initiative options pertaining to the state’s
participation in the Regional Greenhouse Gas Initiative since 2009 (RGGI). RGGI is a multi-state
cap and trade CO2 budget program in the Eastern US. Thus Rhode Island is already a proactive
and early mover at the regional level on climate change policy. This report highlights where and
how the state can capitalize on its early mover advantage to become regionally and nationally
competitive.
29
What is a market based cap-and-trade program?
Several existing and proposed energy legislation/initiatives at the regional, national and
international levels, seek to regulate carbon dioxide emissions from the power sector by pricing
carbon emissions through market-based cap and trade programs.29 The market based cap and trade
program for pollution reduction has a long and proven track record of successfully reducing
targeted emissions at a significantly lower cost than traditional command and control pollution
abatement programs. A cap sets a limit on the amount of emissions, with the capped amount often
decreasing over time. Emitters are only allowed to release as much emissions as they have permits.
A single emission permit allows for the emission of one unit of the pollutant from a regulated
source issued by the federal or state regulatory authority. Permits are either allocated for free
amongst a group of emitters or sold at auction.30 The total number of permits does not exceed the
cap amount. Knowledge of current and future expected decrease in cap amounts allows affected
companies and industry the flexibility to plan ahead.
A cap and trade program has two elements that are central to establishing allowance value:
i. Free or auctioned allowances: The regulatory body can, and has in the past, distribute
the pollution allowances free. As such, setting an emissions cap inherently adds a
cost on the use of carbon creating value, whether or not the permit is initially
auctioned. Emitters are required to surrender one allowance for every unit of
emissions generated.
ii. Allowance trading: Allowances can then be bought and sold in a secondary market,
allowing emitters with lower costs of emissions reduction to capture the allowance
29 Valuing the cost of carbon use can also be achieved through other mechanisms such as a tax or a fee. 30 Based on a few different formulas, one of which is grandfathering based on a facility’s emissions in a base year.
30
value by selling part or all of their allowances. Allowance buyers are emitters for
whom emission reductions, at least in the short run, may be costlier than buying the
“rights” to pollute. Allowance holders may also choose to bank unused allowances
for future use, or sale, when caps get tighter and permit value higher.
Trading permits or allowances then establishes a market for allowances that assigns a value
to the social cost of the pollutant being controlled. The inherent flexibility in program design often
results in companies or industries innovating in order to reduce emissions and use fewer permits,
saving them money. The market environment creates an incentive for industries to invest in more
cost-effective and/or environmentally sustainable technologies. Having the option to buy the rights
to pollute also gives companies and industries additional options in operation, without changing
the overall level of emissions. The following provides a brief background on past and current
market based cap and trade programs operating at the state, regional, national and international
levels.
Historical Background, Program Examples and Outcomes
The US Acid Rain Program
The US Acid Rain Program was established under Title IV of the 1990 Clean Air Act
Amendments. This was the first national cap and trade program in the country that introduced a
system of allowance trading using market based incentives to reduce pollution. The program
mandates significant reductions in sulfur dioxide (SO2) and nitrogen oxides (NOx) emissions from
the power sector. Sulfur dioxide and nitrogen oxides are the primary precursors of acid rain as well
as fine particulate matter (PM2.5) that causes asthma and other lung diseases in vulnerable
population. The SO2 program sets a permanent cap on the total amount of SO2 that may be emitted
31
by electric generating units (EGUs) in the contiguous United States. The final 2010 sulfur dioxide
cap was set at 8.95 million tons, which is a level nearly one half of emissions from the power sector
in 1980.31 Nitrogen oxides reductions are achieved through a program which applies to a subset of
coal-fired electric generating units. 2010 NOx emissions are 27% lower from 1990 levels32. An
updated cost benefit analysis of the Acid Rain Program calculated annualized program benefit in
2010 to be $100 billion, while annualized costs are estimated to be $3 billion. Most notably, the
estimated costs are less than half of the pre-program cost projections from 1990.33
European Union Emission Trading System (EU ETS)
The European Union Emissions Trading System (EU ETS) was the first in 2005, and still the
largest, multinational system for trading greenhouse gas emission allowances with free allowance
allocation. The EU ETS operates in the 28 EU countries and three EEA-EFTA Countries (Iceland,
Norway, and Liechtenstein). The EU ETS covers around 45% of the EU’s greenhouse gas
emissions including carbon dioxide, nitrous oxide, and perflourocarbons. Emissions limitations
are put in place for over 11,000 heavy energy-using installations in power generation and the
manufacturing industry as well as aircraft operators performing aviation activities in the EU and
EFTA states. From 2013 onwards, the cap on emissions from power stations and other fixed
installations is reduced by 1.74% every year.34
Program implementation is progressing in three phases: 2005-2007 (Phase I, also called the
trial phase), 2008-2012 (Phase II), and 2013-2020 (Phase III). Despite a somewhat rocky trial
31 See EPA, “Acid Rain Program”, Available at http://www.epa.gov/AIRMARKETS/programs/arp/index.html 32 See EPA, “Cap and Trade: Acid Rain Program Results”, Available at http://www.epa.gov/capandtrade/documents/ctresults.pdf 33 Lauraine G. Chestnut and David M. Mills, “A Fresh Look at the Costs and Benefits of the U.S. Acid Rain Program”, Journal of Environmental Management, Vol. 77, 2005, pp. 252-266. 34 European Commission, “The EU Emissions Trading System (EU ETS)”, Available at http://ec.europa.eu/clima/publications/docs/factsheet_ets_en.pdf
32
phase where CO2 allowance prices dropped to zero, largely from an oversupply of allowances, the
program has achieved significant reductions in CO2 emission, independent of the 2009 economic
slowdown. As per a 2012 comprehensive report by the Environmental Defense Fund,35 the ETS
helped reduce over 480 million tons of CO2 between 2005 and 2008, equivalent to 8%-13% less
emissions than the “business-as-usual” scenario. ETS also helped in separating emissions from
economic growth during the 2009 recession, and even in EU countries that are growing. As with
the Acid Rain Program, emissions reductions were achieved at relatively low cost and without
much adverse effects on energy intensive sectors. Notably, companies and entrepreneurs have
responded with investments in a variety of profitable low-carbon ventures. In 2013, 72% of new
electricity generation capacity in the European Union came from renewable sources compared to
80% new generation from fossil fuels a decade back.36 As per the EDF report, the renewable
energy industry has created 70,000-90,000 more jobs in Germany than had the same growth been
alternatively powered by fossil fuels. In general, ETS is understood to be factor in accelerating the
pace of innovation within the European Union37.
California’s Global Warming Solutions Act (AB32)
California’s Assembly Bill 32, the California Global Warming Solutions Act of 2006, passed
into law requirements for significantly reducing greenhouse gas emissions. AB 32 requires
California to reduce GHG emissions to 1990 levels by 2020. AB 32 requires that a scoping plan
be put in place and updated every five years to strategize how to cut GHG emissions. The AB32
35 Lucas M. Brown et al, “The EU Emissions Trading System: Results and Lessons Learned”, Environmental Defense Fund 2012, http://www.edf.org/sites/default/files/EU_ETS_Lessons_Learned_Report_EDF.pdf 36 Renewable Energy Policy Network for the 21ST Century, “Renewables 2014, Global Status Report” REN 21, 2014, Paris, France; http://www.ren21.net/portals/0/documents/resources/gsr/2014/gsr2014_full%20report_ low%20res.pdf 37 Karoline S. Roggea & Volker H. Hoffmann, “The impact of the EU ETS on the sectoral innovation system for power generation technologies—Findings for Germany,” Energy Policy, Vol. 38 (12), pp. 7639-7652, 2010
33
program mainly differs from previously discussed programs in its scope. Reductions in GHG
emissions is stipulated to come from virtually all sectors of the economy and is to be accomplished
from a combination of policies, planning, direct regulations, market approaches, incentives and
voluntary efforts. These efforts target GHG emission reductions from cars and trucks, electricity
production, fuels, and other sources. The cap and trade portion of AB32, with allowance auction,
went into effect in 2013.38
The Environmental Defense Fund’s second year progress report on the AB32 cap and trade
program39 shows, that this “grand experiment” is delivering results similar to the Acid Rain and
the EU-ETS programs. The $902 million raised through allowance auction is budgeted for further
GHG and other harmful pollutant reductions, job growth, and rehabilitating communities adversely
affected by climate change. In 2013, California’s economy grew by 2% while emissions from
capped sources reduced by 4%. From 2010-2013, the state’s employment and personal income per
capita outpaced the respective national averages and this growth is projected to continue.
Advanced energy jobs grew 5 times faster than average state employment. Between 2002 and
2012, clean jobs grew ten times faster, while average income in the economy grew 12% higher
than the national average.
Finally, California is also fast becoming a clean technology innovation hub as AB32 propels
the state towards clean energy, fuels, cars and buildings. Since 2006, California has received $2.2
billion in venture capital, higher than all other states combined, into an increasing variety of green
projects. Not surprisingly, between 2009 and 2013, the state emitted 6.6% less CO2 per dollar of
38 California EPA Air Resources Board, “Assembly Bill 32 Overview” available at http://www.arb.ca.gov/cc/ab32/ab32.htm 39 Katherine Hsia-Kiung and Erica Morehouse, “Carbon Market California: A Comprehensive Analysis of the Golden State’s Cap and Trade Program, Year 2: 2014”, Environmental Defense Fund, 2014. Available at http://www.edf.org/sites/default/files/content/carbon-market-california-year_two.pdf
34
output produced, ranking fifth in energy intensity of output in 2011, behind Connecticut,
Massachusetts, New York and Oregon.
The Regional Green House Gas Initiative (RGGI)
RGGI is a state-level market based regulatory program aimed at reducing carbon dioxide
emissions in the eastern United States, currently from the power sector. As stated in the 2005
memorandum of understanding (MOU), the overall program goal is to establish a cap-and-trade
program to stabilize and reduce emissions within participating states while staying consistent with
overall economic growth and the maintenance of a safe and reliable electric power supply
system40. As of 2014, the RGGI member states include Connecticut, Delaware, Maine, Maryland,
Massachusetts, New Hampshire, New York, Rhode Island, and Vermont. There is a cooperative
effort between these states to cap and reduce carbon dioxide emissions from the power sector.
RGGI is the first such US program to reduce carbon dioxide emissions from the power sector
through a regional cooperative as well as the first cap-and-trade program to auction the
majority of emissions allowances, generating revenue for issuing states.
The RGGI cap and trade program is made up of several elements. The multistate carbon
dioxide emissions cap represents the regional budget for carbon emissions from the power sector.
A single carbon dioxide allowance or permit allows for the emission of one short ton of carbon
dioxide from a regulated source issued by the state. After the 2012 program review, the nine RGGI
states set a new cap for 2014 of 91 million short tons of carbon dioxide. The cap then declines by
2.5 each year from 2015-2020. The regulated sources include fossil fuel fired power plants with a
capacity of 25 MW or greater within RGGI states. Since January of 2009, sources are required to
40 RGGI, “Memorandum of Understanding”, December 2005, http://rggi.org/docs/mou_12_20_05.pdf
35
possess carbon dioxide allowances that are equivalent to their emissions from a three year control
period. Another period began on January of 2015 and extends through December of 2017. This
control period requires that each RGGI regulated power plant must hold allowances equal to 50
percent of their emissions during the first two calendar years of each three-year control period and
hold allowances equal to 100 percent of their emissions at the end of the control period. Carbon
dioxide allowances are issued by each RGGI state in an amount defined in each state’s statute or
regulations.
Figure 2.1: RGGI CO2 Allowance Value from 2008-2014
Source: www.rggi.org
CO2 Allowance Value and Revenue under RGGI
The RGGI program has held 26 quarterly auctions since September 2008, where permits sold
for an average market clearing price of $2.73 between 2008 and December 2014. However, as
Figure 2.1 shows, prices have been steadily rising since September 2013, reaching as high as $5.10
per permit in the latest auction completed in December 2014. This rise is both expected in light of
the tightening emissions cap going into effect from 2014 and welcome, from the point of view of
potential revenue for member states. As per Market Monitor reports prepared by Potomac
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Economics,41 RGGI’s independent observer of auctions, allowance auction markets remained
competitive with large bidder participation but without any evidence of market manipulation by a
single or a group of bidders.42 While permit prices fell below $2 between 2009 and 2012 due to an
oversupply of permits by states and a lack of demand from regulated entities due to recessionary
pressures,43 the bids to permit supply ratio has significantly rebounded due to cap tightening by
states and general economic recovery. All evidence indicates a well-functioning allowance market
for CO2 emissions that is responding to the recent excess demand, as theoretically predicted, by
pricing allowances higher.
Allowance auctions since 2008 has generated over $1.8 billion dollars in total auction
proceeds for the member states.44 Rhode Island’s cumulative auction proceeds as of December
2014 stood above $35.7 million.45 Table 2.1 illustrates revenue cumulatively earned and invested
by all current RGGI members. Any difference in total auction proceeds and total investment up to
2012 is committed to 2013 and future programs. The last column in the table therefore shows the
amount of auction funds that are still uncommitted to specific programs as of the December 2014
auction.46
41 Market Monitor reports are available at https://www.rggi.org/market/market_monitor 42 As per RGGI rules no single bidder or group of bidders can buy more than 25% allowances. 43 EDF and IETA, “RGGI The World’s Carbon Markets: A Case Study Guide to Emissions Trading”, Last updated May 2013 44 Note, these numbers do not include New Jersey which left the RGGI coalition in 2012 45 Source: https://www.rggi.org/market/co2_auctions/results#state_proceeds 46 This information is compiled by combining information on allowance proceeds with allowance investments from RGGI’s website. While the auction price and revenue information is current, investment information is only available till 2012.
37
Table 2.1: RGGI Auction Proceeds Earned and Invested by Members 2008-2014
State
Total Cumulative
Auction Proceeds
(2008-2014)
Total Cumulative
Auction Proceeds
(2008-2012)
Total Invested (2008-2012)
Total Available
(2013-2014)
Total Uncommitted
Available (2013-2014)
Northern NE Maine 59,680,379.88 34,246,622 24,838,808 34,841,571.88 25,433,757.88 New Hampshire† 76,335,390.34 42,552,629 35,103,889 41,231,501.34 33,782,761.34 Vermont 14,501,596.43 8,284,461 8,197,616 6,303,980.43 6,217,135.43
Southern NE Connecticut 124,967,181.66 65,167,703 65,167,703 59,799,478.66 59,799,478.66 Massachusetts 316,488,293.21 178,921,781 174,517,434 141,970,859.21 137,566,512.21 Rhode Island 35,727,553.64 17,947,845 11,658,056 24,069,497.64 17,779,708.64
Mid-Atlantic New York† 728,232,766.75 410,586,620 178,946,813 549,285,953.75 317,646,146.75 Delaware 63,852,728.77 29,690,897 18,569,018 45,283,710.77 34,161,831.77 Maryland 401,915,502.10 197,434,494 190,225,568 211,689,934.10 204,481,008.10
RGGI Total 1,821,701,392.78 984,833,052.00 707,224,905.00 1,114,476,487.78 836,868,340.78 Source: Compiled from www.rggi.org Note: †States that allocated RGGI funds to the state general funds
Pathways for Recycling Auction Revenue
An allowance trading program that auctions the “right to pollute” effectively works as a tax
that can have adverse impacts on the producers and consumers of carbon intensive energy. The
academic literature in the environmental economics and policy arena has long recommended
reinvesting the revenue earned from selling permits back into the economy in various ways to
offset the resulting welfare loss. As per this literature, auction revenue can be used to provide lump
sum rebates to consumers, reduce taxes, and/or invest in transitioning to a low carbon sustainable
economy such as investing in technologies to upgrade carbon intensive sectors of the economy,
38
investing in promoting energy efficiency and renewable energy use, investing in public
infrastructure and mass transit, climate change adaptation etc.47
In a 2012 update on the cap and trade component of the AB32 program in California, Burtraw
and Szambelan provide the following insights on the use of auction revenue.48 These pathways are
conceptually applicable to any cap and trade program with allowance auction.
• Financing government expenditures: Auction revenue could be used to fund general
state government objectives such as education, healthcare, and infrastructure. More
effective use would be to fund programs that promote AB32 objectives such as helping
households, businesses, local and state government transition to low carbon
technologies and reduce emissions. Project examples include investments in
transportation, land use infrastructure, providing government support for clean
technology adoption, and assistance for groups vulnerable to climate change.
• Paying dividends to households: Auction proceeds could be returned to households
in the form of dividends in order to offset the higher energy costs from regulatory
programs. Dividends could also be returned on the grounds of compensation for
environmental degradation of the atmosphere, which is a commonly owned resource,
from carbon dioxide pollution.
• Reduce current taxes or prevent future taxes: While some taxes are essential for the
operational and program funding needs of the government, they can also distort
47 Dallas Burtraw, “Cap, Auction and Trade: Auctions and Revenue Recycling under Carbon Cap and Trade,” Prepared for the U.S. House of Representatives Select Committee on Energy Independence and Global Warming, Resources for the Future, Washington, DC, 2008. 48 Dallas Burtraw and Sarah Jo Szambelan, “A Primer on the Use of Allowance Value Created Under California’s CO2 Cap-and-Trade Program”, May 11, 2012 http://next10.org/sites/next10.org/files/20120504_Primer_Revised_ V5.pdf.
39
incentives to work, save and invest affecting economic growth. Using auction revenue
to reduce tax burdens could ‘reincentivise’ these activities and aid economic growth.
A wealth of research has analyzed the practical implications of the theoretical pathways from
the perspectives of economic impacts and legal feasibility in the context of existing and proposed
programs. It is important to note that each of the following studies model scenarios proposed
within the program being studied.
A 2012 report by Next 10 and UC Berkeley modeled the economic impacts of investing
auction funds into eighteen different scenarios under the AB32 program.49 They model the impact
of investing $100 million on each of these scenarios on state GSP, jobs, and state tax revenue for
California. All scenarios yield monetary benefits that far outweigh the investment. For example,
investing in three separate residential energy efficiency programs (upgrading lighting, building
and appliance efficiencies) add $2.8 billion to state GSP in 2020 (compared to business-as-usual),
22,981 jobs (Full Time Equivalent), and $206 million in tax revenues.50 Investing in clean and
public transportation adds $1.3 billion to state GSP, 7944 jobs, and $84 million in tax revenues.
They also find that spending funds on providing dividends or rebates to tax-payers to compensate
for adverse impacts of the program as well as using funds for general state expenditures can be
challenged in courts and has a high legal risk of implementation.
Two reports by ICF International on the AB32 program (2013) and the proposed Minnesota
Green Solutions Act (2010) have also found high net benefits of investing auction revenue into
49 Next 10, “Using the Allowance Value from California’s Carbon Trading System: Legal Risk Factors, Impact to Ratepayers and the Economy”, May 2012 http://www.next10.org/sites/next10.huang.radicaldesigns.org/files/12-NXT-008_Cap-Trade_r2.pdf. 50 This author calculation from the Next 10 report results does not reflect the “Green Bank” scenario which allocates $100 million in loans for energy efficiency and renewable energy projects.
40
alternative projects along the lines of the above pathways.51 For Minnesota, the ICF study modeled
six policy scenarios of investing auction revenue including per capita rebates, consumer incentives,
business incentives, public transportation, worker retraining and hybrid (equal investment in the
previous five scenarios). Spending on per capita rebates was found to impact state GSP and jobs
the least. Compared to rebates, spending on public transportation increases employment by 12-
15% and state output by 1-3 % (using 2020 and 2030 time frames); spending on worker retraining
increases employment by 18-20% and output by 32-39%; and spending on a hybrid approach
returns the highest employment and output gains at 33-56% and 61-65% respectively.
Similarly, the AB32 study completed by ICF models the economic impact of using allowance
value in five policy scenarios: lump sum dividends to all California residents, investment in energy
efficiency, clean transportation, a hybrid strategy involving the previous three programs and free
allocation of allowance to the fuels sector. All five scenarios yielded benefits greater than diverting
funds to the state General Fund. Results show that investments in energy efficiency and clean
transportation lead to the highest job growth while dividend maximizes equity and income growth.
Investing in clean transportation would create 75% more jobs than free allocation of allowances,
while providing dividends would increase income by 20% more than free allowances to the fuels
sector.
Both AB32 and the Minnesota Green Solutions Act propose auction revenue allocation
between program specific government expenditures and rebates or dividends, i.e., the blended
51 See Bansari Saha and Jan Mazurek, “Modeling the Economic Impacts of AB32 Auction Proceeds Investment Opportunities”, December 1, 2013 (http://www.icfi.com/insights/reports/2013/modeling-economic-impacts-of-ab-32-auction-proceeds-investment-opportunities) and ICF International, “Analysis of the Economic, Environmental and Public Health Impact and Potential Revenues in the State of Minnesota”, August 30, 2010 (http://archive.leg.state.mn.us/docs/2010/mandated/100946.pdf)
41
scenario analyzed in the ICF reports, potentially generating the maximum benefits for state
residents.
RGGI allowance value investment priorities are similar to AB32 and the proposed Minnesota
Green Solutions Act. Member states invest in energy efficiency, clean and renewable energy, GHG
reduction and direct bill assistance programs. The following sections discuss RGGI benefits in
detail, including impact on CO2 emissions, revenue recycling programs and related benefits, and
preliminary program outcomes assessment for Rhode Island.
Benefits of Participating in the Regional Green House Gas Initiative
CO2 Emissions: Regional and Rhode Island Trends
As per the 2005 RGGI MOU, the primary purpose of establishing RGGI was “stabilizing
and reducing CO2 emissions within the Signatory States.” Figures 2.2a-b show regional CO2
emissions totals from all sectors of the RGGI economy as well as from the power sector of all
RGGI states. Emissions, measured in million metric tons of carbon dioxide equivalent
(MMtCO2e), are graphed for the period 1990-2012. 1990 is an important benchmark since RGGI
uses 1990 as the base year for emission reductions by 2020. Figures 2.3b-c illustrate state-level
emissions from all sectors and the power sector in each of the nine member states. Figures 2.4a-b
illustrate CO2 emissions from all sectors and the power sector specifically for Rhode Island.
42
Figure 2.2a: Total CO2 Emissions in RGGI Region from 1990-2012
Source: Compiled from EPA’s State CO2 Energy Emissions; http://epa.gov/statelocalclimate/resources/state_energyco2inv.html
Figure 2.2b: Total Power Sector CO2 Emissions in the RGGI Region from 1990-2012
Source: Compiled from EPA’s State CO2 Energy Emissions Data source in Figure 2.2a
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Figure 2.3a: CO2 Emissions by RGGI States from 1990-2012
Source: Compiled from EPA’s State CO2 Energy Emissions; Data link available in Fig. 2.2a
Figure 2.3b: Power Sector CO2 Emissions by RGGI States from 1990-2012
Source: Compiled from EPA’s State CO2 Energy Emissions; Data link available in Fig. 2.2a
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Figure 2.4a: CO2 Emissions in Rhode Island from 1990-2012
Source: Compiled from EPA’s State CO2 Energy Emissions; Data link available in Fig. 2.2a
Figure 2.4b: Power Sector CO2 Emissions in Rhode Island from 1990-2012
Source: Compiled from EPA’s State CO2 Energy Emissions; Data link available in Fig. 2.2a
The charts illustrate the overall success of RGGI in meeting its stated objective of reducing
CO2 emissions below 1990 levels. Regional CO2 emissions, both from the whole economy and the
power sector have indeed been falling. As expected, the decline from the power sector is sharper
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than all sectors combined. Combined GHG emission in the region is projected to reduce by 25%
of 1990 emissions by 2020.52
As illustrated by the state-level emissions graphs, the regional trend in CO2 reduction from
all sectors, relative to individual 1990 levels, is largely driven by reductions made by New York,
Maryland, Massachusetts, Connecticut, and to an extent, Delaware. The northern New England
state of Maine has achieved relatively small, but modest reductions as well. These same states,
except Maine, have also achieved the largest emissions reductions from the electricity sector. In
northern New England, Vermont has achieved impressive CO2 reductions from the power sector.
Overall CO2 emissions from every member state, except Rhode Island and Vermont, have
decreased to levels lower than their individual 1990 levels. Rhode Island in 2012 emitted 19%
more CO2 than in 1990 while Vermont emitted 1.3% more. However, total CO2 emissions seem
to have stabilized and trending downward in Rhode Island. In terms of emissions from the power
sector, the key target of RGGI regulations, Rhode Island’s power sources generated 401% more
CO2 compared to the state’s 1990 levels. The state is the only current RGGI member where power
sector emissions increased relative to 1990. New Jersey, which left the coalition in 2012, is the
other state in the original RGGI territory with higher CO2 emissions from the power sector than
1990 levels.
While Rhode Island was the second smallest CO2 emitter (after Vermont) in absolute terms
in 1990, CO2 emissions from the power sector is currently comparable to that from New
Hampshire, an economy that is larger than Rhode Island in terms of total output, and higher than
52 David Cash, “EPA’s Proposed Clean Power Plan & Regional Compliance Options”, presentation prepared for the Assessing State Goals and Challenges under EPA’s Clean Power Plan seminar, RFF and EPRI, October 14, 2014, Washington, DC.
46
Maine, an economy that is comparable to Rhode Island in total output.53 The state has steadily
reduced overall CO2 emissions from its highest point in 1998, but further progress is required to
be compatible, and compete, with its RGGI neighbors in the southern New England region and
elsewhere. The significant growth in emissions from the power sector in Rhode Island is notable
given natural gas, which is less polluting than coal, is the primary fuel used to generate power by
all six of Rhode Island’s facilities regulated under the program. The noticeable drop in emissions
in 2012, the last year of state-level emissions data availability, is certainly encouraging.
Economic Growth: Regional and Rhode Island Trends
Another RGGI objective is to achieve CO2 reductions without sacrificing economic growth
in the signatory states. Table 2.2 and Figures 2.5a-b confirm that this objective is being met with
various degrees of success. The total regional output in real terms almost tripled between 1990 and
2012. Despite a population growth of over 11% during the same period, the regional economy as
a whole has used 11% less energy, emitted 18% less CO2 from all sources and 40% less CO2 from
the power sector.54 This finding breaks the conventional link between economic growth and energy
consumption that fuels the growth. As with the European Union and California, economic growth
in the RGGI region has also been steadily turning ‘green’ over the years analyzed.
State-level graphs further exploring the growth and energy relationship for all members
except Rhode Island is available in Appendix B. Table 2.2 illustrates the net change in the related
variables between 1990 and 2012 for all RGGI members. States who doubled the size of their
53 The respective state GSPs in real terms for 2013 were as follows: Rhode Island ($53184), New Hampshire ($67848), and Maine ($54755), all in millions of dollars. 54 Regional totals (for GSP, population, energy use, CO2 emissions) is calculated by summing each variable from individual member states for each year from 1990-2012. Growth in each variable for each incremental year after 1990 is calculated as a percentage change between a given year and 1990. Thus growth figures reported in Table 2 present overall growth in the five reported variables between the two end years 1990 and 2012.
47
economy over the 22 years also experienced significant population growth, except Maryland. Four
of the six high growth states such as Massachusetts, Delaware, New York and Maryland,
simultaneously reduced their energy use and CO2 emissions from all sources, effectively reducing
the energy intensity of output growth. Even New Hampshire and Vermont successfully reduced
carbon emissions from their electricity sectors. Reductions in energy use is particularly impressive
for the Mid-Atlantic states given their, historically, higher reliance on coal to produce power.
Table 2.2: Economic Growth and CO2 Reductions in RGGI States between 1990 and 2012
State Growth in GSP
Population Growth
Growth in Energy Use
Growth in CO2
Emissions
Growth in Power Sector
CO2 Emissions
Northern NE Maine 83.43% 7.89% -7.47% -15.42% -15.88% New Hampshire 133.09% 18.87% 10.59% 1.62% -14.06% Vermont 104.36% 10.88% 3.04% 1.29% -91.94%
Southern NE Connecticut 91.30% 9.20% -6.65% -14.40% -34.24% Massachusetts 118.28% 10.41% -17.28% -24.34% -52.01% Rhode Island 89.93% 4.54% 20.12% 18.72% 401.02%
Mid-Atlantic New York 104.31% 8.74% -14.01% -21.27% -48.83% Delaware 120.69% 37.07% -5.75% -20.52% -39.48% Maryland 136.62% 0.93% -9.96% -12.94% -28.29%
RGGI Total 194.76% 11.59% -11.13% -17.95% -40.14% Source: Compiled from BEA (GSP); Census (Population); EIA (Energy Use); EPA (CO2)55
Rhode Island’s experience is somewhat different; not in terms of economic growth, but in
terms of the energy intensity of the growth. While the Rhode Island state economy grew by 90%
55 Table 2.2 and Figures 2.5a and b (as well as similar charts in Appendix B) are compiled from the following sources: Gross State Product (Bureau of Economic Analysis Regional Data on Real GDP Data), Population (Census: 1990's, 2000’s, 2010’s State Intercensial Estimates Data), Energy Use (Energy Information Administration State Energy Data Systems), CO2 emissions (cited in Figure 2.2a)
48
between 1990 and 2012, the state used 20% more energy, generating 19% more CO2 emissions
from all sources, and as already noted, a striking 401% increase in CO2 emissions from the
electricity sector.56
Figure 2.5a: RGGI Regional Economic Growth and CO2 Reductions 1990-2012
Data Sources: Compiled from BEA (GSP); Census (Population); EIA (Energy Use); EPA (CO2)
Figure 2.5b: Rhode Island Economic Growth and CO2 Reductions 1990-2012
Sources: Compiled from BEA (GSP); Census (Population); EIA (Energy Use); EPA (CO2) Note, energy use and total GHG emissions share a near perfect correlation in Rhode Island
56 Note, our estimates of cumulative growth in state output, energy use, and emissions overestimates the change from the base of 1990 compared to the benchmark results by David Cash for Massachusetts (See Footnote 50).
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49
Several factors, besides RGGI participation, could explain the variety of experiences, with
respect to economic growth, energy use, and CO2 emissions reductions illustrated by the data
analysis. The innovation potential and ease of doing business portions of this report explores why
a specific state in the region has, or in Rhode Island’s case, has not grown as much in a cumulative
sense. National trends in carbon emissions and energy use can explain why both have generally
decreased in the RGGI states and the region as a whole, especially since 2007.57 Investment
priorities for RGGI auction proceeds chosen by member states can potentially explain part of this
variation in recent years.
CO2 Allowance Value Investment Choices and Returns: Regional and Rhode Island Summary
The 2012 RGGI report on RGGI investment benefits58 states that, regionally, RGGI auction
proceeds to date are projected to return more than $2 billion in lifetime energy bill savings to more
than 3 million participating households and more than 12,000 businesses in the region. These
investments are projected to offset the need for approximately 8.5 million megawatt hours (MWh)
of electricity generation, save more than 37 million British Thermal Units (mmBTU) of fossil
fuels, and avoid the release of approximately 8 million short tons of carbon dioxide (CO2) pollution
into the atmosphere over their lifetime. The program has financed a $700 million investment in
reducing energy bills, helping businesses become more competitive, accelerating the development
of local clean and renewable energy sources, and limiting the release of harmful pollutants into the
air and atmosphere, while spurring the creation of jobs in the region. An independent 2011 study
57 See EPA, “Trends in Green House Gas Emissions”, Chapter 2 in Inventory of US GHG Emissions and Sinks: 1990-2012, April 15, 2014, Washington, DC < http://www.epa.gov/climatechange/Downloads/ghgemissions/US-GHG-Inventory-2014-Main-Text.pdf> Annual changes in energy consumption and GHG emissions depend on general economic conditions, energy prices, weather and non-fossil fuel alternatives. Longer term trends are explained by consumption scale, population, energy efficiency, behavioral choices, fuel type and its carbon content. 58 RGGI, Inc, “Regional Investment of RGGI CO2 Allowance Proceeds, 2012”, February 2014.
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by the Analysis Group finds that the RGGI states turned $912 million in proceeds from the
first RGGI compliance period into $1.2 billion in economic value for states while adding
16,000 new job-years. 59The same report states how RGGI proceeds are used by states have
very different economic and non-economic impacts on state economies.
RGGI investments fall into four primary program categories: energy efficiency, clean and
renewable energy, GHG abatement, and direct bill assistance programs. The first three categories
can be described as a (targeted) public expenditures pathway for spending auction funds, while
direct bill assistance is a form of income transfer through a rebate program. Table 2.3 breaks down
state-level investments in specific categories, in percentage terms. Table 2.3 also includes
information on revenue spent on program administration by the states themselves. The data clearly
shows significant state-level variation in initial investment priorities.
59 Hibbard, et al, “The Economic Impacts of the Regional Green House Gas Initiative on Ten Northeastern and Mid-Atlantic States”, The Analysis Group, November 15, 2011, http://www.analysisgroup.com/uploadedfiles/publishing/articles/economic_impact_rggi_report.pdf; Although not a big number for a regional total, these jobs were added or job losses avoided (in cases where revenue was used towards closing state budget gaps) during a severe economic downturn and a shrinking regional labor force.
Table 2.3: RGGI Auction Proceeds Investment Categories and Amounts by Members 2009-2012
State
Cumulative 2009-2012 Auction Proceeds Earned and Invested (in dollars)
Cumulative 2009-2012 RGGI Investments by Category (in percentages)
Total Earned Total Invested
Energy Efficiency
Clean and Renewable
Energy
GHG Abatement
Direct Bill Assistance Administration
Northern NE States Maine 34,246,622 24,838,808 96% - - - 3% New Hampshire† 42,552,629 35,103,889 94% 1% <1% - 4% Vermont 8,284,461 8,197,616 98% - - - 1%
Southern NE States Connecticut 65,167,703 65,167,703 70% 23% - - 6% Massachusetts 178,921,781 174,517,434 94% - 3% - 2% Rhode Island 17,947,845 11,658,056 91% - - - 8%
Mid-Atlantic States New York† 410,586,620 178,946,813 65% 9% 16% - 8% Delaware 29,690,897 18,569,018 66% 9% 10% 7% 6% Maryland 197,434,494 190,225,568 23% 6% 3% 64% 3%
RGGI Total 787,398,558.00 516,999,337.00 65% 6% 6% 17% 5% Source: Compiled from www.rggi.org and “Regional Investment of RGGI CO2 Allowance Proceeds, 2012.” Notes: †States that allocated RGGI funds to the state general funds. Any difference in total auction proceeds earned and total investment up to 2012 is committed to 2013 and future programs. RGGI, Inc. earns the difference between 100% and total sum of spending share in each investment category as fees.
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Energy Efficiency (E.E): Approximately 65 percent of 2012 cumulative RGGI investments
to date fund energy efficiency programs in the region. Broadly, energy efficiency programs
improve the way consumers use energy, allowing them to literally “do more with less energy.”
Rhode Island invests 91% of its revenue on energy efficiency programs. While almost all New
England states spend most RGGI revenue on EE programs as well, little is left for spending on
other investment categories in the state after accounting for the 8% administration cost, highest in
the New England region.
Promoting energy efficiency is considered the “low hanging fruit” in the array of clean
technology policies. These programs can lead to reductions in power demand, prices and
expenditures in the short to medium run and CO2 emissions long term. Benefits of investing in EE
policies are largely concentrated within individuals and companies taking advantage of these
impacts, but there are some spillover macroeconomic benefits for the larger economy as well
Clean & Renewable Energy (CRE): More than 6 percent of 2012 cumulative RGGI
investments to date fund clean and renewable energy programs in the region. Clean and renewable
energy programs accelerate the deployment of local, clean, and renewable energy technologies.
Many RGGI-funded programs provide grants or low-interest financing to businesses and
homeowners seeking to install on-site renewable or clean energy systems (e.g. rooftop solar panels,
farm-based wind turbines, or fuel-cell systems). Of all RGGI states, Connecticut spends the most
on renewable energy initiatives, followed by New York, Delaware and Maryland. Some programs
can overlap categories. For example, Massachusetts invests RGGI funds into the Green
Communities program that also requires 15% of electricity supply from renewable sources. RGGI
investments in Clean and Renewable Energy are expected to return more than $73 million in
lifetime energy bill savings to consumers in the region.
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Investments in both EE and CRE programs have the most direct impact on reducing CO2
emissions from the power sector as well as electricity prices by reducing demand for fossil fuel
sources of power generation.
GHG Abatement: Approximately 6 percent of 2012 cumulative RGGI investments to date,
fund GHG abatement programs in the region. GHG abatement programs promote the research and
development of advanced energy technologies, the reduction of vehicle miles traveled, and the
reduction of GHG emissions in multiple sectors. These programs typically identify and target local
needs and opportunities, such as: fuel-cell powered municipal buses; grants for industrial process
improvements that reduce emissions from local industry; and forestry projects that enhance
wildlife habitats while increasing carbon. Currently, New York and Delaware spend significant
percentages on GHG abatement followed by smaller investments by Maryland and Massachusetts.
Direct Bill Assistance: More than 17 percent of 2012 cumulative RGGI investments, fund
direct bill assistance programs in the region. Direct bill assistance programs provide rate relief to
electricity consumers in the RGGI region. Only Maryland and Delaware use this option, Maryland
spending 64% on the program. RGGI investments in Direct Bill Assistance have returned more
than $122 million in bill credits to more than 2 million participating households.60
60 See RGGI, Inc, “Regional Investment of RGGI CO2 Allowance Proceeds, 2012”, February 2014, for state level program spending and program case studies.
54
Table 2.4: Summary Economic Impact by RGGI State and Region61
RGGI Investments
2008-2011 (millions of $)
Value Added (millions of $)
Employment (Job Years)
Northern NE States Maine 27 92 918 New Hampshire 33 17 458 Vermont 7 22 195
Southern NE States Connecticut 52 189 1,309 Massachusetts 143 498 3,791 Rhode Island 14 69 567
New England Total 276 888 7,237 Mid-Atlantic States
New York 327 326 4,620 Delaware 22 63 535 Maryland 170 127 1,370 New Jersey 118 151 1,772
Mid-Atlantic Total 637 667 8297 Regional Impact 57 601
Grand Total 1,612 16,135 Notes: Value Added reflects the actual economic value added to the state and regional economies; does not include the costs of goods purchased from or manufactured outside of the state or region Regional Impact reflects the indirect and induced impacts resulting within the RGGI region as a result of state dollar impacts. Results are discounted to 2011 dollars using a 3% social discount rate
Table 2.4, adapted from the 2011 Analysis Group report, summarizes above investment
returns measured by state and regional economic impacts and jobs added. The reported returns
are purely economic, and do not consider non-economic issues such as impact on climate change
risks and adaptation. The economic “Value Added” measure includes direct, indirect, and induced
effects of investments. Direct impact of RGGI falls on power plant owners, energy consumers and
use of RGGI funds in any of the above investment options. Indirect effect measures new demand
from direct activity such as hiring workers to complete energy audits of buildings and training
61 Adapted from Hibbard et al., “The Economic Impacts,” Table 2: Added column 1 on allowance proceeds (not actual investments) for reference.
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them for the job. Induced impacts include spending on the state’s goods and services from higher
income or income savings from direct RGGI programs.
The variety of outcomes from how states invested initial RGGI earnings is clear from Table
2.4. In New England, Massachusetts added the most net value, followed by Connecticut, Maine,
Rhode Island, Vermont and New Hampshire. Over 70% of RGGI jobs in New England between
2009 and 2011 were created in Massachusetts and Connecticut. In the Mid-Atlantic, Delaware
created the most net value, but New York and Maryland together created 72% of all RGGI jobs in
the Mid-Atlantic region.
Further Discussion on Power Sector Impacts in Rhode Island
Figures 2.6a-c illustrate electricity rates during 1990-2014 for the residential, commercial,
and industrial consumers in each RGGI state. Rhode Island electricity prices for the commercial
and industrial sectors rose sharply, reaching a regional high in 2014 for the industrial sector. The
price rise is observed despite spending 70% of RGGI energy efficiency dollars on improving
energy efficiency of businesses, large and small, as well as commercial and industrial businesses.
Residential electricity price is also high and rising despite spending 21% of energy efficiency
dollars on improving residential energy efficiency.
A cap and trade program inherently increases electricity prices in the short term as the social
cost of carbon gets added to generation and operational costs of electricity production. Several
other factors including fuel price, competitiveness of the generation market, weather, and price of
substitute fuels also impact electricity prices. As stated earlier, EE programs should reduce prices
and consumer expenditures through lower demand. However, rising electricity prices in Rhode
Island for all customers raises questions about the extent to which the current energy efficiency
programs are indeed reducing electricity demand as intended. According to the Analysis Group
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report cited above, Rhode Island ranks 7th in the initial 10 member RGGI consortium in consumer
bill reductions, where bill reductions come from demand and price reductions from investments in
energy efficiency. Massachusetts, New York and Connecticut were the top three states in the
region where consumers saved the most on their energy bills. The state ranked 9th in net revenue
change for power plant owners, also from investments in energy efficiency. New York,
Massachusetts and Maryland were the top three states where power plants saw revenue losses,
accounted as a net benefit for electricity consumers.
Figure 2.6a: Residential Electricity Prices in RGGI States 1990-2014
Source: Compiled from Energy Information Administration, www.eia.gov
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Figure 2.6b: Commercial Electricity Prices in RGGI States 1990-2014
Source: Compiled from Energy Information Administration, www.eia.gov
Figure 2.6c: Industrial Electricity Prices in RGGI States 1990-2014
Source: Compiled from Energy Information Administration, www.eia.gov
The good news from the innovation potential part of this report is that Rhode Island is finally
moving the needle on outcomes from its RGGI energy efficiency investments. The American
Council for an Energy-Efficient Economy (ACEEE) ranked the state third (tied with Vermont and
Oregon) out of 51 in its 2014 energy efficiency scorecard. 62 While Massachusetts attained and
62 See the ACEE State Energy Efficiency Scorecards and ranking determinants at http://aceee.org/state-policy/scorecard
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retained the top spot for four years running, followed by California, Rhode Island has made real
strides in the last few years. Notably, six out of the nine current RGGI members, including
Connecticut and New York were among the top ten on the 2014 list. ACEEE ranks states based
on (1) Utilities and public benefits programs and policies, (2) transportation policies, (3) building
energy codes and compliance (4) combined heat and power policies (CHP), (5) state government
lead initiatives around energy efficiency and (6) Appliance and equipment standards. Rhode
Island’s strict building energy codes are mentioned as an example of energy efficiency strategy for
other states
The less welcome news, based on the detailed historical analysis, is that the state can do
much more to translate the efficiency gains into lower electricity prices and eventually carbon
dioxide emissions from proactive demand side management. This would require continued but
lower investments in energy efficiency and higher investments in renewable energy sources, in
addition to the commitment to 16% renewable portfolio standard by 201963. Lower electricity
prices would be beneficial for attracting and keeping business in Rhode Island, discussed next in
the ease of doing business portion of this report.
Conclusions and Recommendations: Looking Ahead for Rhode Island
Massachusetts and Rhode Island were the original contributors to the design and
development of RGGI, the consortium of nine Northeastern and Mid-Atlantic states who became
the first to regulate carbon-dioxide (CO2) in the United States starting in 2009, through a
cooperative regional carbon dioxide (CO2) budget trading program. The program was set up to
address climate change by finding innovative solutions that would lower energy consumption from
63 American Council on Renewable Energy (ACORE), “Renewable Energy in the 50 States: Northeast Region”, Updated June 2014, http://www.acore.org/files/pdfs/states/RhodeIsland.pdf
59
traditional sources without compromising economic growth. Thus Rhode Island already has the
distinction of being proactive and an early mover at the regional level on climate change policy.
However, the trend analysis in this report shows that until very recently, the state is yet to
capitalize on its first mover advantage in gaining a competitive edge regionally and nationally.
Outcomes from Rhode Island’s participation in RGGI have been quite different from
Massachusetts and most of the other RGGI co-signors in the region. The state has significant room
for improvement in positioning itself to be regionally competitive with respect to energy use and
environmental sustainability in the medium to long term. The following recommendations are
made from the perspective of long-term efficiency in policy planning and implementation, which,
in the case of Rhode Island, must emphasize technology change.
Recommendation 1: Reduce state-level RGGI administrative costs to levels comparable
with neighbors. The New England average in 2012, without Rhode Island, is 3.2%. Lowering
administrative costs to that level would save $861, 496 based on cumulative 2012 auction earnings
and $1.7 million based on cumulative 2014 auction earnings, assuming no change in the
administrative cost percentage past 2012. The cost savings could be reallocated to actual RGGI
investment initiatives that lower energy consumption and promote economic growth.
Recommendation 2: Rigorously assess the returns on energy efficiency programs currently
financed with RGGI funds to understand their effectiveness at the margin and inform long term
program priorities such as investments on demand side management strategies. Rhode Island,
along with most RGGI neighbors in New England spends most RGGI funds on energy efficiency
programs. The strategy is largely sound based on the “low hanging fruit” argument in terms of
quick and relatively easy policy implementation with high benefits. Despite Rhode Island’s recent
achievements with EE, as certified by ACEEE, the preliminary long term analysis presented raises
60
important questions about the overall efficacy of Rhode Island’s current suite of energy efficiency
programs in addressing long term goals of lowering energy demand, prices, and eventually CO2
emissions.
Questions include (1) to what extent are existing EE programs effectively managing
electricity consumption, demand, and prices? (2) Were post 2012 gains in lower electricity sales
and cost savings made independent of the lag effect of the economic slowdown that hit the state
hard? (3) What other energy efficiency programs should Rhode Island fund for broader long term
program success? Reductions in long term energy consumptions are tied to changes in consumer
behavior that are harder to achieve. Detailed and rigorous statistical assessment is required to
answer these questions, one that controls for other factors affecting electricity demand and supply
in the state to isolate the true impact of current energy efficiency programs. Despite Rhode Island’s
third place ranking on the 2014 ACEEE scorecard, Massachusetts, California, New York, Oregon
and Connecticut are considered “truly leading states that have made broad, long-term
commitments to developing energy efficiency as a state resource.”64
Recommendation 3: Rigorously assess and consider distributing RGGI funds over more
program categories, particularly renewable energy and public transportation initiatives in the near
to medium term, for a blended investment approach shown to maximize net investment benefits in
other states. RI should consider diversifying its public investment portfolio to include programs
such as renewable energy, renewable technology education,65 promoting clean public
transportation, worker retraining, bill assistance or a combination of these strategies. Program
type(s) and program mix in the diversified portfolio should be informed by (1) rigorous regional
64 Ibid. 65 Even investments in vocational training such as solar panel installation would keep green jobs in Rhode Island and help grow the labor force.
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economic modeling for Rhode Island as well as the states own (2) medium and long-term goals
for economic growth, energy use, environmental sustainability, as well as social goals for equity
and justice. A multi-sector economic modeling is required specifically for Rhode Island to fully
understand the multiplier effects and net benefits of diversifying spending in the state.
The literature on revenue recycling suggests a blended approach yields higher economic
benefits as suggested for and practiced by California, Maryland, New York, Delaware, and
recommended for Minnesota. The first four of these states have also significantly reduced energy
use and CO2 emissions from 1990 levels showing growth can also be environmentally sustainable.
California is also seeing growth in innovation, income and jobs. Maryland and New York are
seeing significant job growth through RGGI investments, so are Massachusetts and Connecticut.
Internationally, the EU countries including Germany have experienced growth in innovation and
jobs through their renewable and advanced energy programs.
As such, Massachusetts and Connecticut in the immediate neighborhood, as well as New
York, even Delaware and Maryland in the expanded RGGI region, are better positioned to become
green technology drivers in the eastern US. All these states have a head start in addressing other
climate change related challenges including climate change adaptation. RI would need to catch-up
quickly if it wants to redirect and attract new venture capital funds into green start-ups to transition
to a growing but environmentally sustainable economy. The RGGI program design is certainly
flexible enough to accommodate these changes but the state would need to make complementary
improvements to the economy recommended in the innovation potential and ease of doing business
segments to attract investors.
Recommendation 4: Assess current strengths and position the state to reap the benefits of
potential expansion of RGGI to include states outside the current consortium looking to meet the
62
EPA’s new Clean Power Plan standards. One of the limiting factors in diversifying Rhode Island’s
public investment portfolio is certainly the state’s relatively small total earnings from allowance
auctions. While RGGI allowance prices are projected to rise through 2020 in response to
continuous emissions cap tightening, greater price increases can potentially occur from new states
joining RGGI to comply with EPA’s Clean Power Plan, the new federal ruling regulating power
sector CO2 emissions. There is also the added longer term potential from linking RGGI with
California’s AB32 program to increase the geographic reach of the CO2 cap and trade program in
the US to maximize program benefits and reduce costs. Both events would expand the allowance
value and revenue earning potential. The state has a long running experience and success with a
cap and trade program through participation in the US Acid Rain program as well as RGGI. Thus
Rhode Island needs to be prepared to leverage its programmatic and institutional experience, to
quickly and seamlessly transition to a larger CO2 auction market, if it is to take advantage of these
potential upcoming changes as the nation as a whole transitions to a low carbon sustainable
economy.66
3. Ease of Doing Business (Ramesh Mohan, Principal Investigator)
Rhode Island’s economy has struggled to regain ground after being severely affected by the
Great Recession. Yet, its economic outlook improved over the last year. The unemployment rate
66 See EPA’s Clean Power Plan, http://www2.epa.gov/carbon-pollution-standards; Dallas Burtraw, Josh Linn, Karen Palmer, and Anthony Paul, “The Costs and Consequences of Greenhouse Gas Regulation under the Clean Air Act”, American Economic Review: Papers and Proceedings, 104(5), 557-562; Analysis Group, “EPA’s Clean Power Plan: States’ Tools for Reducing Costs and Increasing Benefits to Consumers,” July 2014; Environment-New England, “The Regional Greenhouse Gas Initiative: Performance To-Date and the Path Ahead,” May 2014; and Burtraw et al, “Linking by Degrees: The Incremental Linking of Cap-and-Trade Markets”, RFF Discussion Paper 13-04, Washington DC.
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dropped from 9.3% in December of 2013 to 6.8% in December 201467, with the state’s economy
expanding 3% in the second quarter of 2014. Still, the goal of reaching levels of unemployment
equivalent to 5.2% experienced in prerecession years has been rather intricate as the speed of job
creation is below the national mean. Moreover, Rhode Island’s housing market has been subject
to extreme volatility, compromising the development of the construction industry and discouraging
private investors and developers from engaging in transactions that involve the housing market.
According to the Rhode Island Employment Trends and Workforce Issues Report released
by the Department of Labor and Training, Rhode Island added 20,000 nonfarm jobs in 2014.68
This figure was mainly driven by the Educational & Health Services and the Leisure and
Hospitality sectors, adding 3,400 and 4,900 jobs respectively. Among the largest sectors, Health
Care & Social Assistance, Retail Trade, Accommodation & Food Services and Manufacturing
dominated total employment. In terms of compensation, the highest wages were paid in the
Management of Companies ($113,590), Utilities ($93,070), and Finance & Insurance ($84,417)
sectors. Education ($49,890) was the only remaining sector to pay above the average annual private
sector wage of $45,769. Most notably, the Healthcare & Social Assistance sector compensation
($42,540) was below the national average, despite being the largest sector in terms of total
employment in Rhode Island.
Private employment is pivotal for the economic development of Rhode Island. Therefore, it
is important to assess the likelihood that business will operate within the state’s limits. Several
reports are released on a yearly basis with the objective of measuring the advantage that some
67 See BLS Regional and State Employment and Unemployment Summary January 27, 2015 Table C States with statistically significant unemployment rate changes from December 2013 to December 2014, seasonally adjusted http://www.bls.gov/news.release/laus.nr0.htm 68 RI Department of Labor and Training, Rhode Island Employment Trends and Workforce Issues, 2014 http://www.dlt.ri.gov/lmi/publications/trends.htm
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states hold over others in terms of the ease of doing business. Most famously, CNBC69 and
Forbes70 studies rely on tangible numbers to gauge each state’s performance in terms of
attractiveness for businesses. States receive points based on their performance pertaining to a
number of broad categories that range from the cost of doing business to access to capital. The
data used is publicly traded and can be accessed by contacting different vendors. These reports
prove that states with a friendly business environment tend to attract more business activities than
others, creating a competitive advantage that ultimately spurs economic development.
CNBC 2014 Ease of Doing Business Report
According to CNBC, Georgia received the highest overall ranking followed by Texas and
Utah. Georgia’s placing is mainly driven by exceptional performance in the categories of
Economy, Infrastructure, and Workforce. According to the Georgia Budget and Policy Institute,
Georgia ranks 32nd in job growth since the beginning of 2007. On the other hand, private-sector
employment in Georgia grew by 88,000 jobs in 2014 and 313,000 jobs since 2010. Georgia’s
greatest improvements are seen in the professional and business services, leisure and hospitality,
and education and health services sectors, with the biggest improvement represented by the
infrastructure and economic categories.
Texas and Utah, two states that consistently rank in the top 10, tend to have a competitive
advantage in the Workforce, Access to Capital and Economy categories. Moreover, both states
received favorable scores in the Technology & Innovation and Business Friendliness category. It
is important to indicate that Texas is home to 64 Fortune 500 companies and holds the title of the
69 America’s Top State for Business 2014 CNBC http://www.cnbc.com/id/101758236 70 K. Badenhausen, “Ranking The Best States For Business 2014: Behind The Numbers,” Forbes Magazine (November 12, 2014. http://www.forbes.com/sites/kurtbadenhausen/2014/11/12/ranking-the-best-states-for-business -2014-behind-the-numbers/
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15th largest economy in the world. A key driver of the attractiveness of Texas for large corporations
is the lack of corporate and income tax. Utah’s corporate tax is among the lowest in the nation,
and states with the lowest corporate tax rates
Table 3.1: America’s Top Three States for Business (2014)
State
Cos
t of D
oing
bu
sine
ss
Eco
nom
y
Infr
astr
uctu
re
Wor
kfor
ce
Qua
lity
of L
ife
Tec
hnol
ogy
and
Inno
vatio
n
Bus
ines
s Fr
iend
lines
s
Edu
catio
n
Cos
t of L
ivin
g
Acc
ess t
o C
apita
l
Georgia 20 3 1 1 32 16 14 32 22 11 Texas 23 1 1 11 37 2 20 27 18 5 Utah 16 6 28 12 15 18 4 46 20 1
Source: CNBC http://www.cnbc.com/id/101758236#.
For the fourth year in a row, Rhode Island ranked in the bottom two. The state’s poor
performance in Workforce, Economy, and Business Friendliness coupled with the worst score in
the Infrastructure & Transportation category led to the lowest overall score among all states. Rhode
Island also suffers from complex and relatively high tax rates, which greatly compromises the
willingness of business to operate in the state. The 2013 Small Business Policy Index rated Rhode
Island 10th worst in the nation. 71 More importantly, Rhode Island scores in the bottom 5 in the
following categories: corporate income tax rates, corporate capital gains tax rates, state and local
property taxes, wireless taxes, number of health insurance mandates, per capita state and local
government debt, and highway cost effectiveness. Rhode Island holds an advantage over most
states in the Education and Quality of Life categories and has made considerable improvements in
71 Small Business & Entrepreneurship Council (SBE) Small Business Policy Index 2013 - See more at: http://www.sbecouncil.org/2013/12/12/sbe-council-ranks-the-50-states-in-small-business-policy-index-2013/ #sthash.IpU5MUkd.dpuf
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Technology & Innovation. Yet, these categories do not hold much weight in the overall ranking of
ease of doing business.
Table 3.2: America’s Bottom Three States for Business (2014)
State
Cos
t of D
oing
bu
sine
ss
Eco
nom
y
Infr
astr
uctu
re
Wor
kfor
ce
Qua
lity
of L
ife
Tec
hnol
ogy
and
Inno
vatio
n
Bus
ines
s Fr
iend
lines
s
Edu
catio
n
Cos
t of L
ivin
g
Acc
ess t
o C
apita
l
West Virginia 18 39 40 44 39 48 50 28 5 49 Hawaii 49 34 43 49 1 33 44 42 49 33 Rhode Island 43 44 50 38 19 34 45 18 42 23 Source: CNBC http://www.cnbc.com/id/101758236#.
Forbes Report: The Best States for Business and Careers
Utah was ranked first by the report produced by Forbes in 2014. Utah added jobs at 0.6%
annual clip, which placed the state as the fourth best in the country. The main driver of this
improvement is related to Utah’s pro-business climate and a competitive advantage in the form of
lower energy costs.
It is important to indicate that Utah has recognized technology as its main industry for
growth. In fact, tech emporiums such as Microsoft, Novel, and EBay have operations in this state
and have future plans for expansion. According to Forbes, Ebay and Oracle announced a short-
term plan to add 1,400 and 300 jobs respectively. In addition to technology, financial services has
been an area target by economic developers and venture capitalists. Goldman Sachs currently
employs over 1,700 workers in Salt Lake City, its second largest office in the country after its
headquarters in New York. Utah has also consistently been among the states with the lowest tuition
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cost. This improves the college and high school attainment figures and increases the supply of
skilled labor, which in turn lowers the cost for corporations pertaining to worker compensation.
North Carolina moved up one spot from the 2013 ranking, mainly due to its relatively low
labor cost. Fierce competition for employment in the job market, coupled with the smallest union
workforce in the U.S has given North Carolina a competitive advantage in the labor supply
ranking. In addition, North Carolina regulatory environment is fairly lenient, which induces
employers to hire more workers and expand at a faster rate.
Table 3.3: Three Best States for Business and Careers (2014)
State Cost of Doing
business
Labor Supply Rank
Regulatory Environment
Rank
Economic Climate
Rank
Growth Prospects
Rank
Quality of Life Rank
Population
Utah 5 4 9 6 10 16 2,923,000 North Dakota 9 9 18 4 2 24 733,200 North Carolina 4 7 2 24 9 31 9,901,400
Source: Forbes Magazine http://www.forbes.com/best-states-for-business/list/
Rhode Island is ranked 46th in this ranking. Scarce labor supply, a stringent regulatory
environment, and unfavorable growth prospects are the leading factors that drive Rhode Island’s
poor ranking.
Table 3.4: Rhode Island’s Ranking
State Cost of Doing
business
Labor Supply Rank
Regulatory Environment
Rank
Economic Climate
Rank
Growth Prospects
Rank
Quality of Life Rank
Population
Rhode Island 36 35 49 39 35 20 1,052,200 Source: Forbes Magazine http://www.forbes.com/best-states-for-business/list/
Rhode Island has experienced the third worst net migration out of its state for the past five
years. This comes as a result of lack of job opportunities in the private sector and low wages for
skilled workers. Rhode Island has been among the five worst states for business and careers for
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the past six years according to the ranking provided by Forbes. Yet, it is important to indicate that
low wages can be utilized as a competitive advantage to attract prospective employers looking for
inexpensive labor.
In terms Regulatory Environment, Forbes and CNBC ranked the state 50th and 49th
respectively. Excessive incidence of government in the private sector has been shown to affect
small businesses, which are an essential part of the state’s economic development
Table 3.5: Three Worst States for Business and Careers (2014)
State Cost of Doing
business
Labor Supply Rank
Regulatory Environment
Rank
Economic Climate
Rank
Growth Prospects
Rank
Quality of Life Rank
Population
West Virginia 22 50 48 18 50 39 1,853,600 Maine 40 36 45 48 48 27 1,328,700 Mississippi 18 49 40 49 49 46 2,991,400
Source: Forbes Magazine http://www.forbes.com/best-states-for-business/list/
How does this apply to Rhode Island?
According to the competitiveness ranking made by the Beacon Hill Institute,72 Rhode island
ranked 39th in overall government and fiscal policy, 4th in security, 30th in human resources, 3rd in
technology, 41st in business incubation, 11th in openness, and 39th in environmental policy.
Certainly, Rhode Island’s performance has been below average and the impact on its ability to
attract businesses has been compromised. However, taking a closer look at each of the factors that
influence the ranking provides interesting findings.
Human Capital and Labor Force
72 The Beacon Hill Institute, Suffolk University, 13th Annual State Competitiveness Report 13th Edition 2013 http://www.beaconhill.org/Compete13/Compete2013.pdf
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The role of human capital in the ease of doing business is rather important. However, in this
element, Rhode Island scores in the bottom 10 in the percentage of population aged 25 and over
that graduated from high school. At the same time, most high schools do not offer the same quality
of education compared to other states, with most of the curriculum being outdated. This lack of
human capital translates into businesses choosing to invest in other states that have higher pubic
school rankings compared to Rhode Island.
In addition, Rhode Island ranks 48th in unemployment rate, and one of the five states with
the highest percentage of labor force represented by unions. The proliferation of unions and the
culture that derives from it usually discourages corporations from doing business in a particular
state. In order to attract businesses, Rhode Island must create a comparative advantage or take
advantage of the ones it already has. For instance, according to the Beacon Hill Institute, Rhode
Island ranks 5th in Science and Engineering degrees awarded per 100,000 inhabitants, and is ranked
19th among states with the most scientists and engineers as a percentage of labor force in the
country. Companies are constantly looking to take advantage of the supply of labor and
technological advancements, and Rhode Island is exceptional in both. Thus, the types of
companies that should be targeted are the ones that meet such specifications.
Business Tax Climate
In terms of business taxation, according to a Tax Foundation study in 2014, Rhode Island
ranked in the bottom 10 in the following categories: Corporate tax, unemployment insurance, and
property tax. 73 Property tax is particularly detrimental to the ease of doing business due to the
fact that it is not based on the company’s performance (net income), but simply on the size and
73 Drenkard, S., Emanuel, L. Yahiro, J. (2014) State and Local Sales Tax Rates Midyear 2014, Tax Foundation Fiscal Fact No. 438 Sept 2014 http://taxfoundation.org/sites/taxfoundation.org/files/docs/TaxFoundation_FF438.pdf
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location of fixed assets. The influence of taxes in corporate decisions has been tested empirically
numerous times without a definite result. There are multiple theories that support the fact that
subsidies and tax cuts indeed increase profits, but only in the short run. A high corporate tax in
Providence, for example, might make businesses move to other states since Rhode Island is not
cost competitive. However, some companies make their relocation decisions years before they
relocate, with subsidies and tax cuts as only the “icing on the cake”.
Energy Cost and Availability
Rhode Island’s performance in terms of energy availability has been unsatisfactory at best.
In 2014, the state was ranked 41st and 46th in electricity and natural gas prices respectively. As a
result, the state’s rate of energy consumption has decreased progressively and it is now the state
with the lowest consumption of energy in the nation. Historically, Rhode Island has been a
manufacturing state. Yet, since the manufacturing sector is energy and labor intensive the high
price of electricity coupled with high rent most definitely discourages potential manufacturers to
choose Rhode Island as their location.
The most cost effective energy resources will be renewable in nature going forward. With
hefty taxes on CO2 and SO2 emissions due to be imposed by the federal government in the near
future, projects that rely on tidal, wind, solar, and organic waste energy will eventually become
cost-effective and it will appropriate for Rhode Island to start incentivizing these initiatives.
Renewable energy represents an alternative to stablished markets. It has the potential to boost
employment and attract “green” manufactures or business that support green practices. The role of
Rhode Island would be to offer consulting services to local energy producers. In addition, the state
should facilitate the flow of capital and information from and to producers of renewable energy.
Eventually, corporations will shift their interest towards a cleaner energy as global warming will
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push them to make such decisions. Creating a competitive advantage in this area will prove to be
beneficial in the long-term.
Public Transportation
The geographic location of the state positions it in the major artery of the northeast corridor
on 1-95, offering a major advantage in transporting workers from within the state and also
attracting skilled workers from other states. Nevertheless, there remains a severe lack of proper
public transportation to reach major firms within Rhode Island, such as CVS, Amica and Fidelity.
This affects many executives on short-term assignment or in for business meetings who have a
difficult time finding transportation around the state. A possible solution to this problem would be
creating another transportation hub in a suburban area such as Lincoln Mall that could offer
additional routes.
Providence is located on Amtrak’s Northeast Corridor route, which connects Boston,
Providence and Washington. Additional services are offered to other metropolises like New York
City. Although Amtrak is an alternative to flying and driving, it does not provide significant
savings to its users. Thus, many feel discouraged to either commute to Rhode Island for work, or
pay a touristic visit to the state. On the other hand, the MBTA offers lower prices to frequent users.
An expansion of the MBTA and the RI transportation service would provide great benefits to daily
commuters, and encourage workers in other states to commute to Rhode Island.
According to a recent article in Providence Journal, “T. F. Green’s most valuable attributes
are convenience and accessibility, as recognized year in and year out by numerous passenger and
trade industry surveys and magazines (2013 Travel and Leisure — 4th best airport in America and
2014 Condé Nast Traveler -- 7th best airport in America)”. 74 However, T.F. Green Airport is
74 Kelly J. Fredericks, “How to Restore T.F. Green’s Past Glory,” (February 1, 2015), http://www.providencejournal.com/article/20150201/Opinion/302019943
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suffering from low demand due to hefty ticket prices and the lack of availability of long-distance
flights and flights to major airports like JFK and La Guardia to fly internationally. In order to
compete with its competitors, T.F. Green Airport must implement air service enhancements, add
new airlines and destinations, increase the frequency of flights, and even expand the airport to
make room for larger aircrafts. In addition, Rhode Island should provide airport incentive scheme
for business development at T.F. Green Airport. Exclusive agreement with one of the international
airlines has the potential to generate income in the form of property leases and landing fees. For
example, the deal signed between Delta Airlines and Hartfield-Jackson Atlanta International
Airport allows Delta to base its operations in the Hartfield-Jackson Airport in exchange for hosting
fees. By providing the right incentives, Rhode Island could attract foreign airlines such as Emirates
to use the T.F. Green airport as an exclusive hub to fly to various locations in the world, thus
attracting more customers away from its rivals.
Regulatory environment
In 2007, the Reason Foundation conducted a study intended to measure the effects of
compulsory professional licensing on the business environment75. It leveraged previous studies
and concluded that the cost of regulations reduces competition, wastes valuable resources in
training that may not be relevant to practical job skills, leads to artificially high prices, and leads
consumers to seek black-market services. Rhode Island was ranked as the 7th most licensed state
in the country. In addition, The Pacific Research Institute's Economic Freedom Index ranked
Rhode Island 47th with the most regulatory and fiscal obstacles imposed by each state on its
75 Summers, A.B., (2007) Occupational Licensing: Ranking The States and Exploring Alternatives, Reason Foundation Policy Study 361, August 2007. http://reason.org/files/762c8fe96431b6fa5e27ca64eaa1818b.pdf
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residents. 76 Businesses tend not to relocate to states where regulations are abundant. Moreover,
small business owners and contractors are also discouraged from working in such states.
Providence Business News released a poll survey in 2014 to gather and analyze the opinions
of small-business owners related to the regulatory environment in Rhode Island.77 Respondents
said that health care costs are a major challenge impacting their businesses. In addition, state and
federal regulations, local ordinances, and business taxes have also play an important role in
business performance. Employment and health and safety regulations are also a growing concern
for small-business owners. More specifically owners are becoming more worried with the
complexity of local regulations. In order to avoid this issue, centralization and simplification of
laws and regulations are essential.
Figure 3.1: Top Challenges Identified by All Small Business Survey Respondents
Source: Providence Business News http://pbn.com/Survey-shows-strong-regulatory-impact-on-RI-small-businesses,97143
76 The Pacific Research Institute's Economic Freedom Index (www.pacificresearch.org ) 77 http://pbn.com/Survey-shows-strong-regulatory-impact-on-RI-small-businesses,97143
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Entrepreneurial resources
Connecting entrepreneurs with capital is becoming crucial to improve economic
development. First, entrepreneurs are mostly hungry for information on how to raise sufficient
capital to start or continue with business operations. Secondly, entrepreneurs are constantly
searching for angel investors and lenders across the nation. Rhode Island has a variety of local
banks and credit unions capable of offering loans at a favorable rate. Thus, Rhode Island should
focus on creating a user friendly tool that levers information and networks to access capital. For
example, potential business people currently have to visit several different locations in order to get
the necessary paperwork to begin a business. Rhode Island should try to streamline state and local
government websites to get approval and renewal and facilitate the process of starting a business.
In addition to this, small business owners are constantly looking for alternatives to debt
financing. In some cases, it makes more financial sense for a business to take on surety bonds, or
equity financing and the state’s role should be to prove assistance on these types of products. More
often than not, entrepreneurs and small business owners are unable to accumulate sufficient capital
on their own or struggle to find favorable rates. Rhode Island facilitates the transfer of capital
between investors/lenders and business owners as much as possible by providing expertise in
application processes and assistance on creating a consolidated business plan.
Networking Tool
Besides capital, the power of networking has the potential to attract entrepreneurs to Rhode
Island. For instance, Maryland has created a networking tool that connects experienced tech
executives with young entrepreneurs.78 Maryland has successfully involved colleges and
78 See The Maryland Entrepreneurs Resource List for more details http://tedco.md/program/maryland-entrepreneurs-resource-list-merl/. “The Maryland Entrepreneurs Resource List is a networking tool for connecting experienced tech executives with young startup entrepreneurs. The University of Maryland Baltimore County's ACTiVATE initiative,
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universities in this process by facilitating the transfer of information or know-how between the
people who have the business knowledge and the entrepreneurs who are willing to utilize it.
Implementing such tool in Rhode Island would certainly increase the concentration of STEM
companies.
Massachusetts has taken a different approach. This state is home of some of the most
prestigious universities in the country and has utilized this to create a hub for STEM jobs. The
state has proactively looked for ways to invest in long-term research and development activities
that merge universities, corporations, and startups into one massive business network. In 2012,
Massachusetts provided $1 million for paid internships in startups, and $1 million for a program
that connects entrepreneurs with mentors. Another state that has been widely successful at
attracting entrepreneurs is Georgia. The Georgia Department of Economic Development currently
runs a training program for entrepreneurs that teach local communities how to attract FDI and
encourage small-business growth.
Rhode Island should emulate the initiatives that successful states have implemented over the
years. The key is to make life easier for entrepreneurs, so that they can grow their companies and
ultimately create hubs. Some programs to consider include a patent assistance program, a
technology commercialization assistance program, several innovation initiatives, and a business
incubator program. Rhode Island could look into creating Special Economic Mega Zones (SEMZs)
and/or Free Economic Zones (FEZs) in areas like Quonset Park or Exit 8 strip on Highway 295
(Route 7 Lincoln-Smithfield corridor) where Foreign Direct Investment can be promoted.79 Here,
supported by the state's Technology Development Corporation, gives female entrepreneurs over a year of support and guidance as they launch their tech startups”-- http://www.cnbc.com/id/100699928. 79 See Peter J. Rimmer and Howard Dick, “Appropriate Economic Space for Transnational Infrastructural, Projects: Gateways, Multimodal Corridors, and Special Economic Zones,” ADBI Working Paper Series No 237 (Tokyo: Asian Development Bank Institute, 2010), http://www.adbi.org/working-paper/2010/08/06/4028.
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the state could offer tax incentives for high tech firms that hire students from Rhode Island as a
way to bring in more business and increase employment rather than only concentrating on tax
revenue from such FDI.
Port of Providence
Port of Providence is one of only two deep water ports in New England and it is one of the
busiest in the region. This represents a tangible competitive advantage for Rhode Island as it has
the potential to serve as a medium for exports. An initiative should exist to consistently increase
the target of Rhode Island’s export and the best way to achieve this is to take advantage of the Port
of Providence.
Expansion plans of the ProvPort would generate immediate direct benefits related to coal
exports. In addition, expanding the Port of Providence has the potential for creating hundreds of
direct jobs, stimulating overall exports, and adding economic benefits in the form of indirect jobs.
In addition, the port should introduce clean energy technologies and facilitate the installation of
more wind turbines and solar panels for the port to sustain itself and sell a surplus of electricity to
the grid.
Certainly an expansion of the Port of Providence would only be efficient if Rhode Island
implements export-friendly policies and Export friendly E-Commerce site.80 As the significance
of global trade increases, Rhode Island must be able to keep up with its peers in terms of facilitating
asia.transnational.infrastructural.projects/ for more details. “New special economic mega-zones (SEMZ) are emerging to overcome the traditional enclave-like character of SEZs and accommodate the trend towards global production networks. Their emergence as logistics hubs makes proximity to global gateways an even more fundamental locational criterion. Featuring integrated mixed land use activities, these satellite mega-zones combine airport, seaport, new town, tourism, utilities, industrial park and commerce under a single authority. Employing either public-private partnerships or private developer approaches, the mega-zones, typified by Incheon FEZ and Dubai Logistics City (DLC), are set within a revamped regulatory framework offering investors supply chain competitiveness and superior locational advantages, plus government compliance with World Trade Organization (WTO) rules and International Labor Organization (ILO) commitments.” 80 See http://www.forbes.com/sites/ups/2013/07/16/how-to-build-an-export-friendly-e-commerce-site/ on How To Build An Export Friendly E-Commerce Site.
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export and import processes. Rhode Island has the opportunity to open to international markets
such as Asia and Europe. These markets could be drawn to trade with the state of Rhode Island if
we spur innovation, create Special Economic Mega Zones, improve the capital flows, and
stimulate business growth
The Tourism Industry
Rhode Island is a state that lacks the natural resource advantage that states such as Texas
and California hold. Therefore, Rhode Island must make use of any additional revenue source
available. Developing the Tourism Industry should be in the front of the Rhode Island Economic
Development Agency agenda. According to a study conducted by the Mitch Nichols (a tourism
consultant), Rhode Island lost as much as $12 million of state sales and occupancy taxes due to its
inability to attract visitors. In addition such visitors would have spent an estimate $280 million,
which would have created 3,000 jobs.81
Rhode Island is only spending a fraction of what other New England states spend on tourism
promotional efforts. Considering that tourism supports over 43,000 direct and indirect jobs, it is
important that the state investigates proposals targeted at improving performance as part of a
strategic growth plan. Rhode Island must create and promote a brand that describes the advantages
of the state. For example, Rhode Island is home of some of the best artists in the world produced
by the Rhode Island School of Design. Rhode Island should engage the cultural community to
enhance and showcase the state’s assets. In addition, the state should promote historical sites such
as the Aldrich House, The Breakers Mansion, and the College Hill Historic District.
A consolidated website that highlights some of the activities that can be done in Rhode Island
could help boost the number of visitors. For instance, during the winter, the website could guide
81 K. Bramson, “Rhode Island Told To Spend More To Promote State As Tourist Attraction,” Providence Journal (December 15, 2014), http://www.providencejournal.com/article/20141215/News/312159990
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users on where to go ice-skating, play hockey, go on a wilderness adventure, and ski. During the
Spring/Summer, visitors will want to be informed about Waterfire presented on the rivers of
downtown Providence. Providence Waterfire could be promoted as a larger event with spectacular
laser show features illuminated water, fireworks, magic wall of light on Providence skyscrapers,
water fountain with a special theme opposite the Providence Place Mall, and music festival in a
grand scale for two weeks similar to Vivid Sydney.82 These sorts of activities attract visitors,
create local jobs, attract companies, and ultimately stimulate economic growth.
Conclusion and Recommendations
There are multiple barriers to a competitive business and entrepreneurial climate in Rhode
Island that must be assessed. As previously discussed, regulatory compliance is a topic that must
be evaluated in order for small businesses to set their operations within the state’s limits. Larger
corporations perceive lower costs pertaining to regulatory compliance, whereas start-ups and small
companies are greatly affected by current regulatory arrangements. In addition, it is important for
Rhode Island to take advantage of the workers who graduate from the 11 universities and colleges
located in the state. Attracting companies in which college graduates can apply their knowledge is
imperative. For example, if the best financial analysts in New England are trained by Rhode
Island’s universities, corporations that offer financial services will be more inclined to relocate to
Rhode Island.
Supporting climate research and innovation will accelerate economic development. There is
a vast amount of climate research currently being conducted by college and universities with the
82 http://www.sydney.com/destinations/sydney/sydney-city/vivid-sydney/light
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objective of mitigating negative prospects. Investing in data collection and interpretation initiatives
will provide the state with detailed recommendation on how to tackle specific economic problems.
Recommendations
A clear set of goals must be identified and developed in order to incentivize the growth of
the private sector in the region. These goals must be realistic, measurable, and timely, always
looking for the long-term benefit of the state rather than favoring short-term prospects.
Recommendation 1: Provide education and training opportunities for low-skilled workers
and take advantage of existing university programs to activate the high-skilled labor force.
• Inquire with companies about the skills needed to perform the jobs related to their operations and design programs that train prospective employees in these areas.
• Consolidate, streamline and improve the quality of education in the public school system in various counties. Create a Governor’s High School specializing in a) Math, Science, and Engineering, and b) International Business, Accounting, Finance, and Economics.
• Create a relationship between public schools, training programs, colleges, and universities in order to increase the quality of education
• Support and provide incentives for local firms that create internships to increase access to experiential learning.
• Provide incentive for firms that hire local Rhode Island graduates.
Recommendation 2: Build a robust business ecosystem:
• Create an environment in which the flow of labor supply is efficient and productive knowledge can be shared among companies.
• Alter the corporate tax rate, franchise tax, and other tax incentives to encourage private investment, especially from small companies.
• Offer entrepreneurial services, connect entrepreneurs with banks and venture capitalists, and reduce the prerequisites needed to perform jobs.
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Recommendation 3: Craft a state in which companies and workers can develop a
competitive advantage:
• Reduce the complexity of Rhode Island’s tax code
• Invest in alternative methods capable of reducing energy costs
• Eliminate the $500 minimum franchise tax
• Analyze and reform the unemployment Insurance System
• Improve upon transportation services especially creating hubs for Taxi/Bus/Train around Lincoln Mall and connecting it to downtown Providence, TF Green airport and the main train station.
• Clearly defined expected outcomes of tax incentive programs.
Recommendation 4: Identify the risks that small businesses are undertaking and support
efforts to improve resiliency:
• Communicate with small business owners and attend to their needs.
• Connect small business owners with community leaders.
• Guarantee access to capital, equipment, and knowledge.
Recommendation 5: Promote Rhode Island as a state where businesses can flourish:
• Cultivate industry branding and create a marketing strategy for struggling sectors
• Coordinate efforts to promote Rhode Island’s successful companies such as CVS, Fidelity, Amica, Hasboro, Alex and Ani as examples.
• Encourage foreign direct investment (FDI) by creating SEMZs or FEZs.
• Create a business friendly one-stop E-Commerce site for small business startups and firms intending to export.
81
Appendix A: Regional Innovation Index and Metrics
Table A.1: Human Capital Metrics
Metric Source High School Graduation Rate Department of Education
University Graduation Rate College Completion Chronicle of Higher Education
Amount of Debt Post College American Community Survey 2013 Percentage of Graduates with Debt Project on Student Debt Ph.D. Graduates 2012/Capita
American Community Survey 2013 Percent HS Graduate or Higher Percent Bachelor's Degree or Higher K12 Education Expenditure (per Pupil) Higher Ed Appropriations per FTE FY 2013 Index to US Average State Higher Education Executive Officers
Association Higher Ed Appropriations per FTE Five Year % Change (FY08-FY13) Percent of Households with Computer
American Community Survey 2013 Households With a Broadband Internet Subscription
Table A.2: Economic Capital Index Metrics
Metric Source 5 Year VC Fund Commitments, 2009-2013 (Percent of Total) 2014 National Venture Capital Association
Yearbook 10 Year VC Fund Commitments, 2004-2013 (Percent of Total) Labor Force Productivity Compound Annualized Growth, 2009-2013
HBS/US Economic Development Agency Cluster Mapping Project
2013 Total Exports US Census
Growth Total Exports, 2012-2013
Table A.3: Business Environment Index Metrics
Metric Source Overall Tax Burden State Business Tax Climate, Tax Foundation Forbes Overall Cost of Doing Business Forbes Magazine Council for Community & Economic Research (C2ER) Cost of Living Index, Q3 2014
Council for Community & Economic Research
82
Table A.4: Energy Index Metrics
Metric Source Residental Sector Energy Consumption per Capita, 2012, Million BTU Rank
State Energy Data System (SEDS) U.S. Energy Information Administration's (EIA)
Commercial Sector Energy Consumption per Capita, 2012, Million BTU Rank IndustrialSector Energy Consumption per Capita, 2012, Million BTU Rank Transportation Sector Energy Consumption per Capita, 2012, Million BTU Rank Total Energy Consumption per Capita, 2012, Million BTU Rank Total Energy Expenditures per Capita, 2012, $ Rank Total CO2 Emissions, 2011, Million Metric Tons Rank
Table A.5: Quality of Life Index Metrics
Metric Source Gallup-Healthways Well Being Index Overall Gallup-Healthways Forbes Quality of Life Forbes Magazine
Table A.6: Healthcare Index Metrics
Metric Source Health System Performance Commonwealth Fund
Note: This is the only Index with a single metric.83
Table A.7: Ideas Index Metrics
Metric Source Total Patents, 2013 (per 100,000 population) US Patent and Trademark Office Total R&D Spending in All Fields, 2013 (per capita) WebCASPAR National Science Foundation
83 The Health System Performance ranking used here was developed for the Commonwealth Fund and is built on 42 metrics ranging from health quality to costs to accessibility to insurance rates. See David C. Radley, Douglas McCarthy, Jacob A. Lippa, Susan L. Hayes, and Cathy Schoen, Aiming Higher: Results from a Scorecard on State Health System Performance, 2014, Publication 1743, (New York and Washington: The Commonwealth Fund (May 2014), http://www.commonwealthfund.org/~/media/files/publications/fund-report/2014/apr/1743_radley_aiming_ higher_2014_state_scorecard_corrected_62314.pdf.
83
Table A.8: Prosperity Index Metrics
Metric Source Unemployment Rate, December 2014
Bureau of Labor Statistics Unemployment, Over the Year Change, December 2013-December 2014 Total Non-Farm Seasonally Adjusted Employment Over the Year Change, Dec 2013-Dec 2014 (Percent) Cost Burdened Homeowners (%) American Community Survey/Housing Works
RI Cost Burdened Renters (%) Personal Income per capita, 2013
Bureau of Economic Affairs Median Household Income, 2013 Median Family Income, 2013 Poverty Rate, 2013
84
Appendix B: State-Level Emissions, Economic Growth and Energy Use Charts84
Figure B.1: Connecticut Economic Growth and CO2 Reductions 1990-2012
Figure B.2: Delaware Economic Growth and CO2 Reductions 1990-2012
84 Data Sources for all charts: Compiled from BEA (GSP); Census (Population); EIA (Energy Use); EPA (CO2)
-60.00%
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Gross State Product
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85
Figure B.3: Maine Economic Growth and CO2 Reductions 1990-2012
Figure B.4: Maryland Economic Growth and CO2 Reductions 1990-2012
-100.00%
-50.00%
0.00%
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100.00%
150.00%
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Gross State Product
Population
Energy Use
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Gross State Product
Population
Energy Use
Total GHG
Power Sector GHG
86
Figure B.5: Massachusetts Economic Growth and CO2 Reductions 1990-2012
Figure B.6: New Hampshire Economic Growth and CO2 Reductions 1990-2012
-80.00%
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87
Figure B.7: New York Economic Growth and CO2 Reductions 1990-2012
Figure B.8: Vermont Economic Growth and CO2 Reductions 1990-2012
-60.00%
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60.00%
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1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Gross State Product
Population
Energy Use
Total GHG
Power Sector GHG
-150.00%
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Gross State Product
Population
Energy Use
Total GHG
Power Sector GHG
